Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Year: 2016

[2016] 68 taxmann.com 280 (Mumbai-CESTAT) – Magarpatta Township Development & Construction Co. Ltd. vs. Commissioner of Central Excise, Pune-III

fiogf49gjkf0d
When TDS liability of foreign service provider is borne by service recipient and the service provider is paid entire consideration as per the contract, such TDS component would not constitute consideration for service.
Facts

Appellant received services of a foreign architect for designing and planning of various commercial buildings and service tax liability was discharged on actual consideration paid. As regards TDS liability under the income tax law, in respect of consideration paid to foreign architect, it was borne by the appellant as determined by the terms of agreement. Service tax demand was raised on said TDS component by contending that the TDS would also form part of consideration.

Held

On perusal of the agreement between the appellant and the foreign architect, it was found that the gross amount charged was exclusive of TDS. It was noted that the erstwhile Rule 7 of Service Tax (Determination of Value) Rules, 2006 clearly stated that actual consultant charges needs to be taxed. Hon’ble Tribunal observed that combined reading of erstwhile section 67 of Finance Act, 1994 and the said Rule 7 indicates that amount billed by the service provider is liable for service tax. In present case, when it was found that service tax was paid on entire invoice amount and nothing was on record to provide that TDS component was collected from foreign architect, it was held that TDS liability borne by appellant and paid out of its own pocket cannot constitute consideration for service and accordingly there is no service tax liability.

[2016] 68 taxmann.com 280 (Mumbai-CESTAT) – Lavino Kapur Cottons (P.) Ltd. vs. Commissioner of Central Excise, Thane-II

fiogf49gjkf0d
Once the refund is allowed by Commissioner (Appeals) by speaking order, it is not open to adjudicating authority to revisit the refund claim on merits
Facts

The Appellant filed 3 refund claims of unutilized CENVAT credit availed on input services in terms of Rule 5 of the CENVAT credit Rules, 2004. The said claims were consequential refund claims arising out of Order-in- Appeal wherein the Commissioner (Appeals) had ordered the Original Authority to grant refund. The claim was rejected by the adjudicating authority on the ground that they failed to declare in their ER-2 Returns the details of availment of CENVAT credit on input services and also failed to furnish the documents in support of their claim. It was contended that matter was remanded back with a direction to sanction refund claim and thus it was not within the power of the adjudicating authority to revisit the case and reject refund claim without filing any appeal to higher appellate authority. The First Appellate authority upheld the order rejecting the refund. Aggrieved by the same, the present appeal is filed.

Held

Hon’ble Tribunal observed that Commissioner (Appeals) had passed a speaking order granting refund and nothing was left for the lower authority to revisit the merits of the case. It was held that the lower authorities did not follow the judicial discipline as without contesting the order of Commissioner (Appeals) before higher judicial authority, it was not open for them to reject the refund claims by again getting into the merits of the case when the same is already dealt with by the superior authority. Appeal was therefore allowed.

2016 (42) S.T.R., 50 (Tri. Mumbai) C.S.T., Mumbai-I vs. Bluechip Corporate Investment Centre Ltd.

fiogf49gjkf0d
The amount received as consideration should be considered as cum-tax amount unless the amount of tax is recovered separately.
Facts

The respondent received commission on the sale of bonds of RBI. No service tax was charged on the commission amount. The adjudicating authority confirmed the demand of service tax considering the commission received as inclusive of service tax. The department filed an appeal contesting that no evidence was provided to prove that amount received was inclusive of service tax and the decision in the case of Agro Industries Ltd vs. Commissioner of Central Excise 2007 (210) E.L.T. 183 (SC) was relied upon and it was provided that the judgement in case of Advantage Media Consultant-2008 (10) S.T.R. 49 (Tri-Mumbai) was incorrectly relied by first appellate authority.

Held
Tribunal observed that service tax was not separately charged on the commission during the relevant time and since Supreme Court has dismissed the department’s appeal against the judgement in case of Advantage Media Consultant-2008 (10) S.T.R. 49 (Tri-Mumbai), the Revenue’s appeal is devoid of merits and accordingly dismissed the appeal.

Whether payment of transaction charges to stock exchange amounts TO FTS – SecTION 194J – Part – I

fiogf49gjkf0d

INTRODUCTION

1. Section 194J, in substance, requires every
person [with some exceptions] responsible for paying [Payer] to a resident
[Payee] to deduct tax at source [TDS] from payment of any sum by way of `fees
for professional services’, `fees for technical services’, etc,. at the time of
payment or credit of such sum to the account of the Payee as provided in Sec.
194 J (1) at the specified rate. There are some exceptions/ relaxations from
this requirement with which we are not concerned in this write-up. For the sake
of convenience, reference to TDS requirement at the time of credit is ignored.

1.1 For the above purpose, ‘fees for technical services’ [FTS], has the same
meaning as given in Explanation 2 to section 9 (1)(vii) [said Explanation].
This Explanation effectively defines FTS as consideration paid for rendering of
any managerial, technical or consultancy service. This definition has some
further inclusions and exclusions with which we are not concerned in this
write-up. As such, TDS requirement is required to be complied with while making
payment of FTS by the Payer as provided in section 194J (1). There is also
corresponding provision contained in section 40 (a)(ia), which provides for
disallowance of expenditure incurred by way of FTS in the event of TDS default
u/s. 194J, wherein also some relaxations are provided with which we are not
concerned in this write-up. Section 194J is also amended to cover payments of
`royalty’ within it’s scope by the Taxation Laws (Amendment) Act, 2006 [w.e.f. 13/07/2006]
with which also we are not concerned in this write-up.

1.2 For the above purpose, in the context of payments for different types of
expenses , meaning of the expression FTS under the said Explanation has come-up
for interpretation before the courts/tribunal from time to time.

1.3 The Madras High Court, in the case of Skycell Communications Ltd.
(Skycell’s case) reported in 251 ITR 53 had an occasion to consider meaning of
the expression FTS in the context of payment for availing cellular telephone
services wherein, the Court has taken a view that such payment is made in order
to have the facility of communication with others and in such cases, the Payer
does not contract to receive the technical services [TS]. He agrees to pay for
the use of air time. This judgment also supports the view that mere collection
of a fee for the use of standard facility available for all those willing to
pay for it does not amount to FTS. The fact that the service provider has
installed sophisticated technical equipment in the exchange to ensure
connectivity to its subscriber, does not on that score, make it a provision for
TS. Whatever applies to cellular mobile phone services, also applies to fixed
line telephone services. Neither service can be regarded as TS for the purpose
of Sec. 194J. Similarly, the internet is very much a product of technology
which cannot be provided without installation of sophisticated equipments and
cannot be used by the subscribers without the use of telephone mobile or fixed
lines. On that score, every subscriber of internet service provider cannot be
regarded as having entered into contract for availing TS . According to the
High Court, the provisions of the Act must be construed in the background of
the realities of day to day life in which the products of technology play an
important role in making life smoother and more convenient. In fact, the Court
also found the view of the Revenue applying TDS requirement to subscribers of
telephone as grossly unreasonable. This view of the Madras High Court has been
followed in other cases by the courts/ benches of tribunal. As such, the
general view which emerged was that if a standard facility is provided through
usage of machine or technology, it should not be termed as rendering of TS and
the payments for the same should not be regarded as FTS for the purpose of TDS
u/s. 194 J .

1.4 Further, in the context of payments made to MTNL/BSNL by the companies
engaged in the business of providing cellular telephone services to their
subscribers for providing use of facilities for interconnection between the two
networks at inter connection points known as ports, the Delhi High Court in the
case of Bharti Cellular Ltd and connected appeals [319 ITR 139] took the view
that, the expression TS used in the definition of FTS was not be construed in
the abstract and general sense but in the narrower sense as it is circumscribed
by the expressions ‘managerial service’ and ‘consultancy service’ in the
definition of FTS which have a definite human element attached to them. As
such, according to the Court, the expression TS would have reference to only
technical service rendered by human, it would not include any service provided
by machines or robots. Therefore, according to the Court, payment of
interconnection charges/port access charges could not be regarded as FTS. With
this judgment, in this context, the view started getting acceptance that for
the purpose of rendering TS, the presence of human intervention is crucial and
therefore, as long as there is no human intervention in a service, it cannot be
treated as TS as contemplated in the definition of FTS given in the said
Explanation. This view is also followed in other cases. The issue with regard
to this requirement of presence of human intervention in the provision of TS
got largely settled with the judgment of the Apex Court in the case of Bharti
Cellular Ltd. and other cases [390 ITR 239]. In this case, the Court dealt with
the judgment of the Delhi High Court in the case of Bharti Cellular Ltd
[supra]. In these cases, the Apex Court remitted back the matters to the
Assessing Officers [AO] with the direction that in each case, the AO should
examine a technical expert from the side of the department and to decide,
whether any human intervention was involved in the provision of interconnection
services. In this judgment, the Apex Court also gave certain directions to CBDT
to issue directions to the AOs to examine and bring necessary technical
evidences on record in such cases before deciding the issue and not to proceed
only on the basis of contracts placed before them. From this judgment of the
Apex Court, it would appear that the principle laid down by the Delhi High
Court, in restricting the scope of the expression TS that it should necessarily
involve human intervention, got effectively approved. This view is also
followed in other cases by the Tribunal. Accordingly, the view emerged is that
the element of human intervention, interface or application of human mind or
direct or indirect involvement of human endeavor is necessary for any service
to be regarded as the provision of TS within the definition of the FTS. As
such, what constitutes technical service essentially becomes a question of fact
to be examined in each case. Therefore, to an extent, uncertainty remains in
dealing with this issue.

1.4.1 Subsequently, the CBDT issued Instruction No. 5/2011 dtd 30th March, 2011
in which, by referring to the judgment of the Apex Court in the case of Bharti
Cellular Ltd [supra], directing the AOs. / Transfer Pricing Officers that they
should frame assessments only after bringing on record appropriate technical
evidence that may be required in a case for this purpose and should not proceed
only by the contracts between the parties.

1.4.2 With the above position, with regard to the requirement of human
intervention for providing TS as contemplated in the definition of FTS, further
issue with regard to degree of human involvement became relevant for
consideration. In this context, the issue really faced is whether presence of
incidental/ insignificant human involvement or interface could make an
arrangement provision of TS.As such, in this context, a debate started that is
it a question of more or less of human involvement or is it a question of
presence or absence of human involvement. Generally, in this context, it was
believed that the incidental / insignificant human involvement should not make
the service as TS within the definition of FTS. This view gets support from the
decisions of the Tribunal. However, the Agra bench of the Tribunal in the case
of Metro and Metro [(2014) 29 ITR (trib) 772] took a different view that the
question is not of extent of human involvement but it is the question of either
presence or absence of human involvement. The correctness of this view is
seriously doubted in the profession. But this decision kept this further issue
alive.

1.5 In the context of the meaning of the expression TS in the definition of
expression FTS, the issue was also under debate as to whether the transaction charges
paid to Stock Exchange by its members to transact the business of trading in
securities could be regarded as FTS. This issue was decided by the Bombay High
Court against the assessee in the case of Kotak Securities Ltd [340 ITR 333].
However, the action of the AO in disallowing this expenditure u/s. 40(a)(ia)
was not upheld by the High Court for the reasons stated in the judgment.

1.6 The issue referred to in para 1.5 as to whether payment of such transaction
charges would constitute FTS for the purpose of TDS u/s. 194J and consequent
effect of section 40(a)(ia) for the assessment year in question, dealt with by
the Bombay High Court in the case referred to in the para 1.5 above, recently
came-up for consideration before the Apex Court and has now got resolved.
Considering the importance of this judgment and the other implications thereof,
it is thought fit to analyse the same in this column.

CIT vs. Kotak Securities
Ltd .- 340 ITR 333 (Bom)

2. In the above case, the relevant brief facts were: The assessee company was
engaged in the business of share broking, depositories, etc. The trading in
securities were carried out through recognized Stock Exchanges such as Bombay
Stock Exchange (BSE), National Stock Exchange of India (NSE), etc. The Stock Exchanges
regulate members’ activities like entering into, making, performance and
termination of contracts including contracts between members or between a
member and its constituents or between a member and a person, who is not a
member and the consequences of default, etc. For the purpose of facilitating
such trading activities, the BSE had devised the BSE On-Line Trading (BOLT )
system. Similar system is also devised by the NSE. For the purpose of
convenience, the Court decided to deal with BOLT system devised by the BSE.
This system provides for totally automated screen- based trading in securities
and facilitates the member- brokers to trade in securities from the trade
workstation installed in their offices which has replaced the earlier system of
assembling in the trading ring for carrying out this activity. The BOLT system
provides all the data that is necessary to the intending buyer and intending
seller of the securities and when the best buy order is matched with the best
sell order, the transaction is concluded which is followed by necessary
documentation. Under this system, the trading in securities is conducted in an
anonymous enviornment in such a manner that the buyers and sellers of the
securities do not know the names of each other and the same is revealed only
after the deal is finally settled. Settlement of transactions in securities
entered into by the members is done as per the procedure adopted by the stock
exchange which is continuously updated from time to time. The trading and
settlement activities are closely monitored in BSE by a system known as BSE
online surveillance system [BOSS]. As such, for the purpose of settling the
transactions entered in to by the members, delivery of securities and connected
matters, appropriate mechanism is provided by the Stock Exchange which is
governed by the relevant rules and regulations provided under the bye-laws of
the BSE. For the purpose of providing this facility of entering into trading in
securities, etc. through the BOLT system, the transaction charges are levied by
the BSE on the members, who enter into such transaction.

2.1 T he assessee company had furnished Return of Income for the Asst. Year.
2005-06 and during the relevant previous year, the assessee had paid to the BSE
an amount of Rs. 5,17,65,182 towards the transaction charges without deducting
any tax. During the assessment proceeding, the AO took the view that the
transaction charges paid by the assessee were in the nature of FTS covered u/s.
194J and therefore, the assessee was liable to deduct tax and the tax having
not being deducted, the AO disallowed the entire expenditure of transaction
charges u/s. 40(a)(ia). The first appellant authority took the view that the
Stock Exchange is not merely a mute spectator providing only physical
infrastructure to the members but it was a supervisor, overseer, manager,
controller, settlor and arbitrator over the security trading done through it
which necessarily had vital inputs and ingredients of rendering managerial
services and accordingly, confirmed the action of the AO However, the tribunal
took the view that the Stock Exchange does not render any managerial, technical
or consultancy service and the assessee was not required to deduct any tax u/s.
194J from the payment of transaction charges and consequently, provisions of
section 40(a)(ia) are not attracted. Accordingly, the disallowance made by the
AO was deleted. On these facts, the issue as to applicability of Sec. 194J to
the payment of transaction charges and consequent applicability of Sec.
40(a)(ia) came up before the Bombay High Court at the instance of Revenue. In
substance, the issue before the Court was whether the transaction charges paid
by the assessee company could be regarded as FTS covered u/s. 194J for the
purpose of making TDS and consequent disallowance u/s. 40(a)(ia).

2.2 Before the Court, on behalf of the Revenue, it was, interalia, contented
that the Stock Exchange through the BOLT system provides a trading platform
which is highly sophisticated and constantly monitored and managed by the
managerial staff of the Stock Exchange and hence, the services rendered by the
Exchange are TS covered u/s. 194J and since the assessee has failed to make
TDS, the AO was justified in disallowing the expenditure under Sec. 40(a)(ia).
On the other hand, on behalf of the assessee, it was, interalia, contented that
transaction charges paid by the assessee for the use of a system provided by
the Stock Exchange. The BOLT system, like the ATM system provided by the banks,
does neither envisage a contract for rendering technical services nor a
contract for rendering managerial services, but merely a contract for usage of
BOLT system. Mere fact that the BOLT system itself is a device set-up by using
high technology, in the absence of a contract for rendering technical services,
cannot be a ground to hold that payments of transaction charges are FTS u/s.
194J. As such, provisions of section 40 (a)(ia) are not applicable, there being
no liability to deduct tax u/s. 194J.

2.3 For the purpose of deciding the issue, the Court referred to the relevant
part of the provisions of section 194J(1) and the said Explanation as it stood
at the relevant time and noted that the plain reading of the provision shows
that the expression FTS includes rendering of any managerial services and the
question is, by providing the BOLT system for trading in securities whether the
Stock Exchange renders managerial services to its members. The Court also noted
that, the Tribunal as well as the counsel for the assessee strongly relied on
the judgment in Skycell’s case (supra), wherein it was held that the cellular
mobile service provider does not render any technical service though high
technology is involved in the cellular mobile phone and therefore, section 194J
is not attracted.

2.4 The Court then stated that the judgment of Madras High Court in Skycell’s
case is distinguishable on facts. In that case, the subscriber who had
subscribed to the network was required to pay for the air time used by the
subscriber at the rates fixed by the service provider. In the facts of that
case, the High Court took the view that the contract between the subscriber and
the service provider was to provide mobile communication network and the
subscriber was neither concerned with the technology involved in this process
nor was he concerned with the services rendered by the managerial staff in
keeping the cellular mobile phone activated. As such, the contract between the
customer and the service provider was not to receive any technical or managerial
service and the customer was only concerned with the facility of being able to
communicate with others on payment of charges. Accordingly, in that case, there
was no linkage between the contract for providing a medium of communication
through the cellular mobile phone and the technical and managerial service
rendered by the service provider in keeping the cellular mobile phone
activated.

2.4.1 The Court then proceeded to distinguish the facts of the case of the
assessee as compared to the facts before the Madras High Court in Skycell’s
case and for that purpose stated as under [pages 340-341]:

“. . … in the
present case, there is direct linkage between the managerial services rendered
and the transaction charges levied by the stock exchange. The BOLT system
provided by the Bombay Stock Exchange is a complete platform containing the
entire spectrum of trading in securities. The BOLT system not merely provides
the live connection between prospective purchasers and prospective sellers of
the respective securities / derivatives together with the rates at which they
are willing to buy or sell the securities, but also provides a mechanism for
concluding the transaction between the two parties. The BOLT system withholds
the identity of the two contracting parties, namely, the buyer and the seller
of the respective securities/ derivatives. Under the screen-based BOLT system,
the entire trading system is managed and monitored right from the stage of
providing the platform for the prospective buyers/sellers of the securities /
derivatives till the date the deal struck between the two parties are finally
settled in all respects. The very object of establishing the stock exchanges is
to regulate the transactions in securities and to prevent undesirable
speculation in the transactions. To achieve this goal, the stock exchange
continuously upgrades its BOLT system so that the transactions carried on
through that system inspire confidence in the general public and that the
transactions are settled smoothly and expeditiously. Thus, the entire trading
in securities is managed by the Bombay Stock Exchange through the BOLT system
provided by the stock exchange.

Unlike in the case of cellular mobile phones
where the user of the cellular telephone is at the discretion of the subscriber
and the service provider is not regulating user of the cellular mobile phone by
the subscriber, in the case of the BOLT system, the user of the system is
restricted to the trading in securities and the same is completely regulated by
the stock exchange. If during the course of trading, it is found that a member
is indulging in malpractices the stock exchange is empowered to suspend the
member broker apart from making him liable for various other consequences.
Thus, the decision of the Madras High Court in the case of Skycell [2001] 251
ITR 53(Mad) is totally distinguishable on facts and the Income-tax Appellate
Tribunal was in error in applying the ratio laid down therein to the facts of
the present case.”

2.5 Further, the Court rejected the contention raised on behalf of the assessee
that there was no contract to render technical/ managerial services in the
present case and stated that the very object of providing BOLT system is to
provide complete platform for carrying out these activities. It is only if a
member trades through the BOLT system, it is required to pay transaction
charges depending upon the volume of trading. Once the trading through BOLT
system takes place, the member is assured that the contracting party is a
genuine buyer or seller, as the case may be, and that the price offered by the
opposite party would be in consonance with the norms laid down by the Stock
Exchange and the transaction would be settled effectively and expeditiously.
According to the Court, the measure of levying the transaction charges is not
relevant and the fact that transaction charge is based on the value of the
transaction and not on the volume is not determinative of the fact as to
whether managerial services are rendered or not.

2.6 Proceeding further, in support of the view that the case is covered u/s.
194 J, the Court further observed as under [page 342]: “Unless the stock
exchange constantly monitors the transactions relating to the sale or purchase
of the securities right from the stage when the two contracting parties
interact through the BOLT system, it would be impossible to ensure safety of
the market. When there is considerable variation in the price of the securities
offered to be sold or purchased the in-built system alerts and remedial measures
are taken immediately so that no panic situation arises in the stock market.
With a view to regulate the trading in securities, the stock exchange provides
risk management and surveillance to the stock brokers to ensure the safety of
the market. The surveillance function involves price monitoring, exposure of
the members, rumour verification on a daily basis and take remedial actions
like reduction of filters, imposition of special margin, transferring scrips on
a trade to trade settlement basis, suspension of scrips/members, etc. These are
some of the identified managerial services rendered by the stock exchange for
which transaction charges are levied. ”

2.6.1 In support of the above, the Court further pointed out as under [page
342]: “The fact that the BOLT system provided by the stock exchange has
in-built automatic safeguards which automatically gives alert signal if the
fluctuation in the prices of the securities exceed a particular limit
prescribed by the stock exchange does not mean that the managerial services are
not rendered, because , firstly, the in-built mechanism in the BOLT system
itself is a part of the managerial service rendered by the stock exchange and,
secondly, even the in-built mechanism provided in the system is varied or
altered by the stock exchange depending upon the circumstances encountered
during the course of rendering managerial services.”

2.7 Rejecting the argument that the BOLT system is like the ATM system provided
by the banks, the Court stated that no trading activity is carried on at the
ATM like under the BOLT system under which the activity is
monitored/regulated/managed by the Stock Exchange.

2.8 Considering the above, on the issue of applicability of section 194J, the
Court finally held as under [pages 342-343]: “In the result, we hold that
when the stock exchanges are established under the Securities Contracts
(Regulation) Act, 1956, with a view to prevent undesirable transactions in
securities by regulating the business of dealing in shares, it is obvious that the
stock exchanges have to manage the entire trading activity carried on by its
members and accordingly managerial services are rendered by the stock
exchanges. Therefore, in the fact of the present case, the transaction charges
were paid by the assessee to the stock exchange for rendering the managerial
services which constitutes fees for technical services u/s. 194J read with
Explanation 2 to section 9(1)(vii) of the Act and hence the assessee was liable
to deduct tax at source before crediting the transaction charges to the account
of the stock exchange. ”

2.8.1 From the above, it would appear that the Court took the view that, the
Stock Exchange is rendering managerial services. According to the Court, the
in-built mechanism in the BOLT system is itself a part of managerial services
rendered by the Stock Exchange and even such in-built mechanism provided, is
varied or altered as per the need during the course of rendering managerial
service. As such, the payment of transaction charges is FTS, as the definition
of FTS includes consideration for managerial services and accordingly, the same
is covered by section 194J.

2.9 The Court then dealt with the issue of disallowance u/s. 40(a)(ia). After
considering the object of the introduction of section 40(a)(ia) as explained in
CBDT circular No/ 5 dtd 15th July, 2005, the Court noted that during the period
1995-2005, neither the assessee made TDS from the payment of transaction
charges nor the Revenue raised any objection or initiated any proceedings for
default in making TDS. The Court, under the circumstances, felt that nearly for
a decade both the parties proceeded on the footing that section 194J is not
attracted. Under the circumstances, according to the Court, no fault can be
found with the assessee for not making TDS u/s. 194J for the assessment year in
question [Asst Year 2005-06].The Court also noted that from the Asst Year
2006-07, the assessee has started deducting tax from such payments, though not
as FTS but as royalty. The Court also noted that, presumably, the Revenue has
not suffered any loss for non- deduction of tax as the Stock Exchange has
discharged its tax liability for that year. On these facts, the Court took the
view that no action can be taken u/s. 40(a)(ia) and held as under [page 343]:

” In any event, in the facts of the present case, in view of the
undisputed decade old practice, the assessee had bona fide reason to believe
that the tax was not deductible at source u/s. 194J of the Act and, therefore,
the Assessing Officer was not justified in invoking section 40(a)(ia) of the
Act and disallowing the business expenditure by way of transaction charges
incurred by the assessee.”

2.10 From the above, it is worth noting that though the Court held that the
payment of transaction charges constitutes FTS covered u/s. 194J, under
peculiar circumstances, the Court also took a fair view that disallowance u/s.
40(a)(ia) cannot be made as both the Revenue and the assessee were under the
bona fide belief for nearly a decade that the tax was not required to be
deducted.

[2016-TIOL-450-CESTAT-CHD] M/s. Carrier Air-conditioning and Refrigeration Ltd vs. Commissioner of Central Excise, Delhi-IV

fiogf49gjkf0d
CENVAT credit of service tax paid on renting of branch offices, health insurance of employees upto 31/03/2011, construction services upto 31/03/2011, travel agent services and interior decorator and architect service is allowable.

Facts
The Appellant paid rent for their branch offices which assisted in procurement of orders and delivery of goods and was used for provision of erection, commissioning and repair services. Insurance services were availed in relation to employees who travel for business meetings, sales, training etc. and for loss or damage to the goods. Further, credit was availed on construction services for dismantling of building and construction of a storage shed and on travel agent service used for travel for the purpose of business meetings, sales etc. Credit was also availed on interior decorator and architect’s services in relation to branch offices and showrooms. The department contended that the service of renting was utilised beyond the place of removal and the other services had no nexus with the manufacturing activity and thus credit was denied.

Held
The Tribunal relying on the decision of Oracle Granito Ltd. [2013-TIOL-822-CESTAT-AHM] wherein CENVAT credit on renting of immovable property for marketing offices was allowed, it was held that such service is eligible for CENVAT credit and also considering that the premises were used for provision of services credit was allowed. Further, relying on the decision of Stanzen Toyotetsu India P. Ltd [2011 (23) STR 444 (Kar.)] credit on health insurance of employees was allowed upto 01/03/2011. Insurance for loss or damage of goods was allowed to the extent they covered journey of goods upto the place of removal. In relation to construction services it was noted that as per Rule 2(l) of the CENVAT Credit Rules, 2004, input services includes service in relation to setting up, modernisation, renovation or repairs of a factory and relying on the decision of Commissioner of C. Ex. Delhi III vs. Bellsonica Auto Companies India Pvt. Ltd. [2015(40) STR 41 (P&H)] [Refer BCAJ December 2015] credit was allowed. Further relying on the decision of Goodluck Steel Tubes Ltd. [2013 (32) STR 123 (Tri.-Del)] credit was allowed on travel agent’s services. Credit on interior decorator and architect’s services was also allowed being in the nature of modernisation/renovation or repair of factory or an office relating to such factory or premises.

[2016-TIOL-576-CESTAT-MUM] Aditya Birla Nuvo Ltd. vs. Commissioner of Central Excise, LTU Mumbai

fiogf49gjkf0d
There is only one charging section in service tax i.e. section 66 and section 66A is only a deeming provision. Therefore when tax is paid u/s. 66, credit is admissible. Further when the tax is not required to be paid, credit is nothing but refund of the tax erroneously paid.

Facts
The Appellant paid service tax on commission paid by them to the foreign commission agents for the period January 2006 to April 2010 under the provisions of the Act read with Rule 2(1)(d)(iv) of the Service Tax Rules, 1994 and availed CENVAT credit of such amount. The department denied the credit on the ground that section 66A creating a charge of service tax on services received from outside India by a person in India is not specified in Rule 3 of the CENVAT Credit Rules, 2004. The Commissioner allowed credit for the period from 18/04/2006 i.e. from retrospective insertion of section 66A in Rule 3 of the Rules. Being aggrieved by the order the present appeal is filed.

Held
In respect of omission of section 66A in Rule 3(1), the Tribunal noted that there is only one charging section i.e. section 66. Section 66A is merely a deeming provision and is not a charging section which is also made clear by circular 354/148/2009-TRU dated 16/07/2009 wherein it is provided that “provisions under section 66A state………….. and accordingly all the provisions of Chapter V of the Finance Act, 1994 would apply. Therefore, it is clear that section 66A is not a charging section by itself. The charging section remains section 66 even for the services imported. In other words, the tax collected from the recipient in terms of section 66A is also tax chargeable under section 66”. Further, the said circular provides that there is no mistake or omission in the relevant provisions of CENVAT Credit Rules, 2004 and credit should be allowed if they are in the nature of input services. Further, while allowing the credit it was held that when tax itself was not required to be paid prior to 18/04/2006 the credit is nothing but a refund of the tax erroneously paid. Further, it was held that extended period cannot be invoked as the credits were reflected in the ER-1 returns and the matter involved interpretation of statutory provisions.

[2016-TIOL-337-CESTAT-BANG] M/s Gem Motors vs. Commissioner of Central Excise & Service Tax, Coimbatore

fiogf49gjkf0d
Rule 6(3) of the CENVAT Credit Rules, 2004 applies only when there is use of the common input without maintenance of separate accounts. When an area is allocated to be used for provision of taxable service CENVAT credit attributable thereto is available in full.

Facts
The Appellant uses an earmarked space for providing taxable services and the lease deed provides the sq. ft. area used for that purpose. Service tax paid on the rent for such area is availed as CENVAT credit. The department contended that the formula prescribed by Rule 6(3) of the CENVAT Credit Rules, 2004 should be applied to determine the eligible CENVAT credit.

Held
On verifying the lease deed, the Tribunal observed that the document provided the area attributable to the provision of service. Therefore, it was held that in absence of any physical inspection report showing anything contrary, CENVAT credit of service tax paid on rent paid in respect of that space used was allowed.

2015 (41) STR 379 (Mad.) Transcoastal Cargo & Shipping Ltd. vs. UOI

fiogf49gjkf0d
Passing of adjudication order without personal hearing amounts to violation of principle of natural justice.

Facts
Show Cause Notice (SCN) was issued for non-payment of service tax. Appellant filed its reply and thereafter, a personal hearing was fixed and an adjournment was sought. Next date for personal hearing was granted, but no notice was given. Meanwhile, an order confirming demand was passed citing non-appearance during personal hearing. The said order was challenged before the High Court.

Held
The High Court observed that the department had passed the order against the assessee on account of non-appearance. On being asked to produce the evidence of serving of letter for hearing, the department could not produce the acknowledgement for dispatch of such notice. It was held that it is imperative to give an opportunity of hearing where the question of law has to be properly dealt with as it may affect the Appellant with civil consequences. Taking note of non-production of evidence of service of notice, the department was directed to grant a hearing and then pass the order.

[2016] 66 taxmann.com 31 (Gujarat ) – Commissioner of Central Excise vs. Dashion Ltd.

fiogf49gjkf0d
Since detailed records were maintained, even though assessee failed
to take registration as input service distributor, utilisation of CENVAT
credit by one unit for discharging liability of another unit located in
the same place was allowed.

Facts
Assessee, having five
manufacturing units and also engaged in providing services, availed
CENVAT credit of duty paid on inputs, input services and capital goods.
Without obtaining registration as input service distributor (ISD),
CENVAT credit of one unit was utilised for discharging liability of
another unit. However, detailed records were maintained in respect of
such cross utilisation. Revenue authorities denied credit on the ground
that ISD registration was not obtained and that credit of one unit is
utilised for discharging liability of another unit without pro-rata
distribution. However, the Tribunal decided the matter in assessee’s
favour. Revenue preferred appeal before the High Court.

Held
The
Hon’ble High Court observed that at the relevant time, there was no
restriction of pro-rata distribution in Rule 7 of CENVAT Credit Rules.
It further held that there is nothing in Registration Rules or in CENVAT
Credit Rules, which would automatically and without additional reasons
disentitle an ISD from availing CENVAT credit unless and until such
registration was applied and granted. The High Court affirmed the
decision of the Tribunal that in such circumstances, requirement of
registration is procedural and curable in nature, particularly when it
is found that full records were maintained and were available to
department verifying its correctness. Accordingly, appeal of the
department was dismissed.

2016 (41) STR 418 (Guj.) Devang Paper Mills Pvt. Ltd. vs. Union of India

fiogf49gjkf0d
Mere mentioning of incorrect code does not amount to non-payment of duty.

Facts
The Appellant by oversight deposited excise duty in an incorrect assessee code. This fact was informed to the department with a request to rectify the same. However, the department rejected the request and issued Show Cause Notice for recovery of duty with penalty and interest. The said notice was challenged by filing the present writ petition.

Held
The High Court held that merely mentioning of an incorrect code does not amount to non-payment of duty as government had received payment in that incorrect code and this fact was not denied. Further, it was noted that there was no separate manufacturing activity inviting separate duty liability under that code. Accordingly, the department directed the accounting division to give due credit.

[2016] 66 taxmann.com 196 (Gujarat) – Commissioner of Central Excise and Service Tax vs. Saurashtra Cement Ltd.

fiogf49gjkf0d
There cannot be said to be intention of duty evasion when assessee
relies upon favourable judgment which later on turns out to be against
assessee by order of higher judicial forum.

Facts
By
applying the ratio of a favourable Tribunal judgment, the assessee
availed CENVAT credit of service tax in respect of certain services.
However, said judgment was later reversed by jurisdictional High Court. A
Show Cause Notice for recovery of CENVAT credit was issued to assessee
by invoking extended period of limitation by alleging malafide intention
of evasion of duty. The assessee did not dispute tax demand, but
contended that extended period was not invokable as the Tribunal
judgment relied upon was in their favor at that point of time and there
was no intention of evasion of duty.

Held
The Hon’ble
High Court held that when the issue was disputable and at one point of
time, the view of the Tribunal was in favour of the assessee, extended
period of limitation was not invokable and penalty not leviable.

[2016] 66 taxmann.com 133 (Karnataka HC) – Commissioner of Service Tax, Bangalore vs. Kyocera Wireless (I) (P) Ltd.

fiogf49gjkf0d
Method of passing final order by making reference to paragraphs of common “interim order” passed by clubbing various cases on similar issues, is held to be invalid.

Facts
With a view to reduce pending appeals on identical issues relating to refund of CENVAT credit under Rule 5 of CENVAT Credit Rules, 2004, the Tribunal passed a common interim order by clubbing nearly 192 cases, and treating those cases as partly heard. Based on the said order, a final order was passed. Appellant contended that Tribunal erred in deciding the appeal in line with the observations made in the interim order, which is not in accordance with the law.

Held:
The Hon’ble High Court held that scope of interim order is very limited as it is temporary and effective only during the pendency of litigation and ceases to exist as soon as the final order is passed. No law can be laid down in an interim order and hence, passing final order referring to the paragraphs in the interim order is not a speaking order. Accordingly, it was held that passing a common interim order and applying the same to the final order of the individual cases is strange and contrary to the settled principles of law. It however suggested that instead of referring to interim order, the Tribunal can pass final order in one case and adopt the same in other batch of cases.

[2016-TIOL-433-HC-MUM-CX] Tien Yuan India Pvt. Ltd vs. The Union of India.

fiogf49gjkf0d
If duty ordered to be refunded is not refunded within three months
from the date of receipt of the application, then interest mandated by
section 11BB(1) of the Central Excise Act, 1944 must follow.

Facts
An
order sanctioning refund was passed by the Tribunal. The Revenue
appealed against the order and the same is admitted and pending in this
Court. However the order of the Tribunal was not stayed. The Assistant
Commissioner refunded the amount without interest.

Held
The
Court held that when the duty ordered to be refunded u/s. 11B(2) of the
Central Excise Act, 1944 is not refunded within three months from the
date of receipt of application u/s. 11B(1) of the Act, the award of
interest must follow as mandated by section 11BB(1) of the Act. The
Court directed the department to pay the interest @ 6% from the expiry
of three months of the receipt of application till the date of refund
within 2 weeks from the receipt of the Court’s order.

Transportation activity vis-à-vis Lease of Vehicles

fiogf49gjkf0d
Introduction
It is always a debatable issue as to whether transportation activity is a service or it is an activity involving leasing of vehicles. Transportation can be of goods or of passengers. Normally, in transportation activity the respective vehicles like trucks or buses are operated by the owners. However, there can be different kinds of agreements. If the relevant agreement is held to be an agreement for service then it may be liable for service tax, but there will not be any liability under the State VAT laws. However, if the transaction is determined to be a transaction of leasing vehicles, then VAT will apply.

The situation depends upon facts of each case. There are number of judgments having different interpretations. Recently, Maharashtra Sales Tax Tribunal (MSTT) had an occasion to deal with one such issue.

Buthello Travels vs. State of Maharashtra (VAT A.No.1135 of 2015 dt.11.12.2015)

Facts
The Hon. Tribunal has noted the facts as under: “12. Now in this case the issue agitated before us, which is regarding the amount received by the appellant from PMPML towards hire charges of the buses. In this context it would be useful to refer the settled legal position. The legal position is referred by Andhra Pradesh High Court in the case of State Bank of India and Others vs. State of Andhra Pradesh (70 STC 215). The principle is as under-

“With that there is a transfer of the right to use or not is a question of fact which has to be determined in each case having regard to the terms of contract under which there is said to be a transfer of right to use.”

The second principle laid down is that the agreement has to be read as a whole to determine the nature of transaction. Therefore, it is very essential to refer to the Lease Agreement for Hiring of Buses. In view of the above, we reproduce herewith some relevant portions of the agreement dated 22nd July 2004:

“Whereas
a) Pune Municipal Transport (PMT) intends to expand and augment its existing fleet of passenger buses.
b) to achieve the same, Pune Municipal Corporation suggested to hire passenger buses. Accordingly PMT published a tender notice as on 28/04/2003 in Marathi and English newspapers.
c) in response to the above advertisement 1 of the bidder is present contractor who is second part of this Agreement submitted his tender as per the terms and conditions thereof.

Now therefore this agreement witnesseth and it is hereby agreed by and between the parties as follows: 1

) This agreement will come into force only after buses are handed over by the contract work to PMT as per schedule “B”, duly registered with RTO Pune and permitted by RTO Pune to ply the buses on stage carriage permits held by PMT and no liability will be incurred on PMT till the agreement comes into force.

2) Buses must comply to the specification as enumerated in Annexure ‘A’ and the number and size of buses to be provided shall be as per Annexure ‘B’.

3) Tenure of the Agreement will be for a period of 5 (five) years from the date of permission to ply the buses of contract on PMT permit granted by RTO Pune.

4) The hired buses will be registered with RTO Pune in the name of PMT as lessee and will be operated as stage carriages within operational area of the PMT. The medium buses will be operated minimum 7,000 km per month, the minibuses will be operated minimum 6,000 km. per month, subject to the reasonable daily operation.

5) (i) the PMT will provide conductor with tickets, way bill and other conductor’s equipment.
(ii) It shall be the right of PMT to collect the fare charges. The fare charges will be credited to the account of PMT. The contractor shall not have any right to claim over the cash collection for any reason whatsoever.
(iii) The conductor of the bus alone shall collect all the fare and luggage charges. Neither the private bus contractor nor the driver who shall have any claim on the fare and luggage charges or any amount so collected.

6) The General Manager PMT shall have sole discretion to identify the routes on which hired buses shall be deployed. The contractor shall have no right to claim any particular route for operation.

(7) Responsibilities of the Contractor
(i) To provide the bus with driver possessing valid driving license with P.S.V. badge and complying PMT norms and certificate of medical fitness from competent authority. Driver shall follow the instructions of the authorities of the PMT. The driver will have to undergo training and test of driving. If necessary, driver should undergo medical examination by the medical officer of the corporation. Only successful driver will be approved. Expenditure of the training of the driver by PMT will have to be borne by the contractor. Driver must fulfill the norms prescribed by PMT. The driver should have knowledge of Pune City. However Contractor will be permitted to employ the surplus bus drivers employed with PMT where the post of drivers has become surplus on the Establishment of PMT.
(ii) It will be the responsibility of contractor to ensure that driver maintains close coordination with conductor and provide facilities to passengers and ensure that the passengers are not put to any inconvenience. The driver should have polite behavior with public and passengers and PMT staff.
(iii) The contractor shall not employ a person as a driver for operating a bus on hire basis who has been removed or dismissed, retired on superannuation from the service of PMT or any other Public Undertaking. Also driver must be of the age less than 58 years. Driver who has met with a fatal accident during the contract period should not be continued for 2 months.

Thereafter the driver will be continued by the contractor on his satisfaction given in writing to the PMT that the driver was not at fault for the accident.

(iv) The contractor shall provide uniform to the driver as prescribed by the PMT. The contractor shall provide an identity card with photo attested by contractor and PMT to the driver. Contractor shall furnish photo copy of the driving license of the driver to PMT.
(vi) The contractor/driver shall scrupulously follow instructions issued by the PMT periodically. As and when the PMT finds behaviour and conduct of the driver questionable, upon the notice, the contractor of hired buses shall replace him with the substitute driver immediately. If the private bus contractor fails to replace such a driver within a period of 7 days of notice thereafter, the bus assigned to that driver shall be liable to be discontinued without prior notice and no hire charges will be payable to contractor.
(xiv) The contractor shall produce the vehicle for inspection at the time of deployment and also subsequently whenever required by the PMT.
(xv) Contractor shall inform the place where he will be parking the vehicles and place where he will be repairing the vehicles. This may be checked by PMT authorities.

8) Calculation of kilometres of hired buses
(iii) Distance operated for making payment will be reckoned from appointed terminus for plying vehicles as per the kilometers of the trip distance as per time table.
(iv) Cancelled kilometers on account of mechanical breakdown enroute and any other reasons beyond the control of PMT shall be deducted.
(v) The contractor shall make available the bus for a minimum 16 hours a day. In case bus is not made available minimum 16 steering hours a day, it will not be counted as a day for the purpose of reckoning the number of days operated in a month.
(vi) In case of cancellation of trips for any reasons deduction shall be made and actual kilometres operated be reckoned for payment for hire charges.
(vii) In case of breakdowns PMT can divert the passengers to any other hired bus or bus of PMT. On such occasion the kilometers from the point of the breakdown to the destination point shall be deducted.
(viii) Increase in kilometers due to enforcement of law and order shall not be reckoned for hire charges where PMT has not changed its fare structure. …”

There are further terms which are not reproduced here for the sake of brevity.

The Hon. Tribunal has referred to number of judgments cited byboth the sides about nature of lease transaction. Hon. Tribunal has referred to judgments including that of Bharat Sanchar Nigam Ltd. (145 STC 91)(SC) and also considered the criteria laid down in the said judgment about nature of lease transaction.

After referring to citations, the Hon. Tribunal has arrived at the following conclusion.

“13. After having perused the copy of Agreement between the appellant and PMT, it becomes amply clear that the appellant has given the buses on hire to PMT for a specified period. During the entire period of contract, and when the buses are standing idle or have free time or are not being used by PMT, the contractor (appellant) is prohibited from using these same buses for his personal use or gain. This proves that, during this period of agreement the buses along with the drivers are completely at the disposal and under the control of PMT. Now we need to address the appellant’s claim that he is not a ‘dealer’ as defined under section 2 (8) of MVAT Act. In support of his claim the appellant has relied on the judgment of Honourable Bombay High Court in the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom).

14. In order to determine whether there is a transfer of right to use goods so as to make the contract one of sale under article 366 (29 A) (d) on the point of law, both the parties are unanimous that the test is of effective control and possession with respect to the goods.

In para 13 of the judgment of Honourable Bombay High Court, in the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom), their Lordships observed that, “In the present case, the permissions and licenses with respect to the cabs are not available to the transferee and remained in control and possession of the respondent. It is the driver of the vehicle who keeps in his custody and control the permissions and licenses with respect to the Maruti Omni Cabs or the said permissions and licenses remained in possession of the respondent. These are never transferred to M/s NDPL. It, therefore, cannot be said that there is a sale of goods, as transfer of right to use in as much as a necessary ingredient of sale, the transfer of right to use the goods, is absent”.

15. In the present case before us, it is very crucial to understand the nature of transaction. It is broadly outlined, as we understand from the records and documents placed before us. The Pune Municipal Transport is a public transport undertaking established as per the provisions of section 66 (20) of the BPMC Act 1949, to cater to the needs of commuters in and around the Pune City, who holds the stage carriage permits. The appellant does not hold or own stage carriage permit.

It is agreed between the parties that, the buses must comply with the specification as enumerated in the terms and conditions of the agreement. Tenure of the agreement will be for a period of 5 years from the date of permission to ply these buses of contractor on PMT permit granted by RTO , Pune.

16. On perusal of the copy of the agreement before us, it clearly specifies that the buses should be registered in the name of PMT as lessee. Clause number 15 of the agreement indicates that, the copy of the RC book, insurance policy and fitness certificate of the bus be deposited with PMT or duly exhibit the copy of the documents in the bus. This clearly exhibits that, overall custody and control of the documents is with the PMT. The admitted position which emerges is that, PMT is made available with the legal consequence and legal right to use the goods, namely the permissions and licenses with respect to the goods. This being the factual difference in the present case and the case of Commissioner of Sales Tax, Maharashtra State, Mumbai vs. General Cranes [2015] 82 VST 560 (Bom), the appellant is rightly held as a dealer under the MVAT Act, and assessed as unregistered dealer.”

Thus, The Hon. Tribunal has considered the given transportation activity as liable to tax under MVAT Act as Transfer of Right to Use goods.

A further position considered by the Hon. Tribunal is that, there were receipts for other transportation where the facts were not same as discussed above. Hon. Tribunal has directed the deletion of tax on such receipts. The said direction is as under:

“17. In our considered opinion, all the criteria as set out by Honourable Supreme Court in the judgment in the case of Bharat Sanchar Nigam Ltd. and another vs. Union of India and Others [2006] 3 VST 95 (SC), are satisfied. Therefore, we have no hesitation to determine the impugned transaction with PMT as a sale, as per section 2 (24) Explanation – (b) (iv) of MVAT Act, liable to tax. However, on perusal of assessment order it is observed that the assessing officer has taxed the total income of the appellant, which includes bus hire receipts from other customers. In our considered opinion the appellant is entitled to relief of tax including consequential interest and penalty levied on the turnover of income from other customers, other than PMT.

Hence, we pass the following order.”

Conclusion
Thus, the situation about attraction of service tax or VAT in relation to transportation activity is to be seen in light of individual facts and terms of agreement. As different facts are considered by courts, broad principles will gradually emerge.

SERVICES PROVIDED BY A GOVERNMENT OR A LOCAL AUTHORITY TO BUSINESS ENTITIES

fiogf49gjkf0d
Preliminary
With effect from July 01, 2012, service tax regime has undergone a complete overhaul and most of the services are now covered under the service tax ambit. Earlier, every activity (service), which was liable for service tax was defined by way of specific nomenclature and a definition was provided for each service. However, since the definition of ‘service’ is now introduced, the onus is shifted to the service provider and in some cases to service receiver under Reverse Charge Mechanism (RCM), to ascertain whether a particular activity is a service or not and failure to do so would result into a tax liability or lead to a litigation.

One of the significant amendments made in the negative list based taxation of services governed u/s. 66D (a) (iv) of the Finance Act, 1994 (“Act”) comes into effect from April 01, 2016. For many business enterprises receiving services provided by a government or a local authority, this is very important as it is likely to have far reaching implications. To understand the said amendment in its entirety, one needs to go through section 66D (a) (iv) of the Act before the amendment was made which is reproduced below for easy reference:

Position before the amendment

“Section 66D of the Act (Negative List of Services)

“The Negative list shall comprise of the following services, namely:-

a) Services by Government or local authority excluding the following services to the extent they are not covered elsewhere
i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency service provided to a person other than Government;

ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;

iii) Transport of goods or passengers; or

iv) Support services, other than services covered under clauses(i) to (iii) above, provided to business entities;”

b) ……….
c) ……….”.
………….

“Support Service” was defined u/s 65B (49) of the Act as under :

“support services” means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis.”

If above stated support services are provided by the government or a local authority, the liability of discharging service tax is shifted to the services receiver under RCM in terms of Section 68(2) of the Act read with Notification No. 30/ 12 – ST dated 20/6/12 (as amended).

Position after the amendment

Section 66D(a)(iv) of the Act

Vide Clause 107 of the Finance Act, 2015, section 66D (a) (iv) of the Act has been amended, which has been made effective from April 01, 2016 vide Notification No 15/2016 – ST dated March 01/2016. The amended section 66D (a)

(iv) of the Act is reproduced below:

Section 66D (Negative List of Services)

The Negative List shall comprise of the following services, namely:-

“a) Services by government or a Local Authority excluding the following services to the extent they are not covered elsewhere-

i) (unchanged)
ii) “
iii) “
 iv) Any services, other than services covered under clauses i) to iii) above, provided to business entities.”

Also, vide clause 105 (h) of the Finance Act, 2015, the definition of “support service” as defined under section 65B (49) of the Act has been omitted with effect from April 01, 2016.

Notification No. 30/2012 – ST dated 20/6/12 (as amended vide Notification No. 18/2016 – ST dt. 1/3/16 (Relevant Extracts) I The taxable services – ……..

(A) (iv) provided or agreed to be provided by – …….

(C) Government or local authority excluding,-

1) Renting of immovable property, and

2) Services specified in sub-clauses (i), (ii) and (iii) of the clause (a) of section 66D of the Finance A ct, 1994.

to any business entity located in the taxable territory;

II The extent of service tax payable thereon by the person who provides the service and any other person liable for paying service tax for the taxable services specified in paragraph I shall be as specified in the following Table, namely: –

Brief Analysis of Amendment

Criteria for taxability

A large number of the services provided by the government or a local authority to a business entity may get covered under the service tax net if they satisfy the following criteria for taxability:

Whether any activity carried out or done falls under the definition of ’service’ or not? (‘Service’)

Whether such service is provided or agreed to be provided by the government or a local authority? (‘Government’ / Local Authority)

Whether the recipient of such service is a Business Entity? (“Business Entity”)

Whether there is a consideration paid or payable for such activity/ service? (‘Consideration’)

Whether such activity carried out/ service provided is covered under exemption/ negative list of services or falls under exclusion portion of the definition of service?(Excluded/Exempted)

If the answers to the criteria stated in (a) to (d) above is ‘YES’ and the answer to the last criteria (e) is ‘NO’”, service tax would become payable by the recipient of the service under RCM

Criteria to ascertain whether any activity constitutes ‘service’ u/s. 65B (44) of the Act As mentioned earlier, the major task that would have to be decided is whether a particular activity performed by one person for another is still a service or not. Also, in view of a declared service definition u/s. 66E (e) of the Act [viz. “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act”,] it is very difficult to arrive at a conclusion as to which activity amounts to service and which does not. To ascertain whether any activity falls under the definition of a service or not, the following criteria need to be applied:

Whether any activity constitutes merely – a transfer of title in goods or immovable property, by way of sale, gift or in any other manner?

Whether any activity constitutes- a transaction in money or actionable claim?

Whether any activity constitutes- a provision of service by an employee to the employer in the course of or in relation to his employment?

Whether any activity constitutes – fees taken in any Court or Tribunal established under any law for the time being in force?

Whether any activity constitutes – the functions performed by the members of Parliament, members of State Legislative, members of Panchayats, members of Municipalities and members of other local authorities who receive any consideration in performing the functions of that office as such member?

Whether any activity constitutes – the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity?

Whether any activity constitutes – the duties performed by any person as a Chairperson or a Director in a body established by the Central Government or State Government or local authority and who is not deemed as an employee before the commencement of this section?

Whether such activity is covered under exempted list of services/negative list of services?

Determination of Taxability

It is important to note that, after ascertaining whether a particular activity is a service or not per se so as to attract service tax, taxability will be determined on satisfaction of the following two conditions viz.:

Whether such service is provided or agreed to be provided by a ‘person’ for “another person”?

Whether such service is provided for a consideration?

If the answers to the above two conditions is ‘YES’, then service tax becomes payable

For the correct interpretation of the amended section 66D (a) (iv) of the Act, understanding of the following important definitions would be very much essential:

“Business Entity” defined u/s. 65B (17) of the Act is as under:

“business entity” means any person ordinarily carrying out any activity relating to industries, commerce or any other business or profession.

“Government” defined u/s. 65B (26A) of the Act as under:

“Government” means the Departments of the Central Government, a State Government and its Departments and a Union Territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with Article 150 of the Constitution or the rules made thereunder.

“Local Authority” defined u/s. 65B(31) of the Act as under :

“local authority” means –

a) a Panchayat as referred to in cause (d) of article 243 of the Constitution;

b) a Municipality as referred to in clause (e) of article 243P of the Constitution;

c) a Municipal Committee and a District Board, legally entitled to, or entrusted by the government with the control or management of a municipal or local fund;

d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);

e) a regional council or a district council constituted under the Sixth Schedule to the Constitution;

f) a development board constituted under article 371 of the Constitution; or

g) a regional council constituted under article 371A of the Constitution.”;

Taxability Position
With effect from April 01, 2016, a large number of activities /services provided by government/local authority to business entities would come within the ambit of service tax under RCM. Hence, it would be a huge challenge to determine taxability, on the basis of criteria discussed above.

It needs to be expressly noted that, under RCM there is no threshold limit prescribed for payment of service tax. Hence, say when a trader who is not registered with service tax department makes a payment of fees for Rs. 10,000/- to government/local authority which is liable to service tax he would have to register and comply with the service tax law despite very low service tax liability of Rs.1,500/-. This is likely to enhance compliance burden on small and medium businesses, in particular and would be totally contrary to government’s initiative to promote “ease of doing business.”

Taxability Position is discussed hereafter with some illustrations :

Merchant Overtime Charge (MOT)

MOT charge paid for availing services of verification of export goods and sealing thereof by the Department of Excise, Government of India, provided to a business entity would get covered within service tax net under RCM since it fulfills all the conditions/criteria for taxability.

Registration Fees for registering title documents

Since registration fees are collected for providing the service by a state government department for registration of the title documents and preservation thereof in their records to a business entity, service tax under RCM would become payable. However, if the said fees are paid by an individual personally & not as business entity, service tax would not be payable.

Deduction made by government departments for the deposit of Service provider for poor service quality

Since tolerating an act by the government department of poor quality of construction is a service specified under a Declared Service [section 66E (e) of the Act,] and the consideration for such service is the amount so deducted from the deposit, service tax under RCM may become payable by the service provider as a service recipient.

Fees for Filing of Appeals etc paid to CESTAT

Such service falls under the exclusion portion of the definition of ‘Service’ and hence would be not taxable under service tax nor under RCM in terms of Clause (c) of section 65B (44) of the Act.

The above are only a few illustrations. However, facts of every case would have to be examined to determine taxability. Implications of taxability in cases like license fees for 3G/4G, Allocation of coal blocks for mining and related work could have a far reaching implications. The same would require a very detailed study and examination.

Conclusion
Considering far reaching implications of taxability of services provided by government/local authority to business entities with effect from April 01/2016, the following is suggested:

Applicability of RCM needs a serious consideration so as to ease compliance burden, particularly on small and medium business enterprises, who may not be registered with service tax department.

If taxability under RCM is maintained, it is essential that for ease of doing business a transaction threshold (say Rs. 50,000/-) is prescribed.

Detailed guidelines/clarifications need to be issued by CBEC with practical examples to facilitate understanding & avoid litigation.

Welcome GST Transitional Provisions under GST

fiogf49gjkf0d
Whenever there is a change in the existing system of taxing goods and services or introduction of a new tax in the nature of indirect taxes, there arises a need of designing appropriate provisions for its smooth transition. These transitional provisions play an important role in the successful implementation of the new system. Almost all countries, all over the world, have passed through such a situation. The Indian taxation system has also undergone various reforms in the past and the biggest reform in the field of indirect taxes is nearly ready for introduction.

We have discussed, in the past few months, on how successfully the system of VAT (GST) has been implemented worldwide, and, we have also discussed some important aspects of GST law and procedures of some of the leading countries. While our discussion will continue till our Government finalises an appropriate draft of Indian GST law, let us consider some basic issues concerning transition from existing multiple taxation system to one single law (called GST) to be operative all over India. In comparision to other countries, the law makers in India will have to devote little more efforts in designing the transitional provisions. The basic reason for that, is present, we have several laws taxing various transactions at certain stages of procurement, production and supplies, and, some of these laws are governed by the Central Government and some by the States. There are various methods under which these taxes are being levied and collected at present, while some have the features of VAT or partial VAT , the others are still continuing with the old system of sales tax (For example: Central Sales Tax). Another area of concern is ‘dual GST’, which will have two major components CGST and SGST, and, in addition thereto IGST. As the proposed ‘dual GST’ is likely to subsume all these taxes like Excise Duty, Service Tax, State VAT , Central Sales Tax, etc., it is necessary to understand the complexities of transactions and taxation thereof, particularly during transition.

Although, the government has already issued certain draft procedures like procedure for registration, returns, payment of tax and refunds, all these draft reports need a complete overhaul so as to achieve the desired results. Any new tax law has important ingredients like point of taxation, valuation, the subject matter of tax, place of supply and the transitional provisions, etc. It is equally important that smooth flow of input credit (i.e. excise duty on inputs and capital of goods, sales tax or VAT , Central Sales Tax, service tax) is allowed to be transmitted conveniently and without hassles into the new law. In absence of any guidelines from the authorities, the probable scenarios of the transitional provisions are stated by referring to GST Acts of several countries. The purpose of this article is to provoke thoughts on the subject.

The potential concerns that arise in smooth transition may be listed as follows:

Registration and obligations of the assessees
Goods in stock (including lying with agents and job workers)
Goods in transit or consignments pending approval of customer
Goods return and/or subsequent revision in price
Branch transfers
Inter-state transactions
Sale in Transit
Carry forward and transfer of input tax credits
Pending Refunds
Point of taxation for overlapping transactions
Exempt goods and services in current regime, which are no longer exempt in GST and vice versa
Treatment of unutilised credit
Continuing supplies and works contract
Dealers governed by composition schemes
Dealers enjoying incentive schemes

There may be many other areas of potential concerns that are required to be addressed during the transition period. Some of the issues, concerning above points, are discussed in brief herein below:

Registration and obligations of the assessees

Transitional provisions should ensure that the existing registered dealers/assessees continue with their registration or get registration under GST law automatically without any hassles. Such transition should be paperless to the maximum extent possible and within pre-fixed time line. The registration number should be such that the constitution of the assessee, the nature of business in which he is engaged into, location of the assessee including principal place of business, branches and other premises, contact details, jurisdiction of the assessing officer can be tracked easily. The registration number as linked to PAN should also facilitate with smooth transfer of information between different tax authorities such as Customs, Income Tax, registrar of documents, etc.

The registration details with various departments, at present, should be updated in advance with necessary information as may be required for issuing new registration numbers. The entire procedure for granting new numbers should be online and uniform for all the States all over India. It may be necessary to ascertain, in advance, from existing dealers that whether they would like to continue with their registration and whether in one State only or all the States or in some of the selected States. The registration numbers need to be granted accordingly at the option of existing registered dealers/assessees, without any hassles.

Goods in stock including lying with agents and goods in transit or consignments pending approval of customer
In respect of stock on hand in pre-GST regime, the sale taking place in post GST regime (called as ‘supply of goods and services’) will be subject to GST on sale value in case of domestic transactions. In case of exports of goods and services, place of supply rules will be formulated. These rules will cover inter-state supplies also. The enabling rules will be required to be framed for levy of GST to the assessee’s own depot in another state and supply made thereafter. In case when the goods sold prior to the appointed day1 are returned subsequently, the rules are required to be framed for refund of payment of sales tax2 /VAT / CST paid in the pre-GST regime.

In case of goods lying at agent’s premises, whether the agent sales goods to a customer on behalf of the principal or return them back to the principal, both the cases may have to be treated as taxable supply in GST regime. A suitable declaration of such stock and its valuation on the appointed day from the agent as certified by the principal may be required for this purpose.

Point of Taxation Rules prescribing time of supply will be required to be framed for sale contracted in pre- GST regime but actual sale takes place in post-GST regime. Such rules may be different for ascertained and appropriated goods for supply and the goods which are under process of manufacture and the unascertained goods. Pre-GST regime of sales tax/VAT may apply if the payment is received in that period though actual supply may take place in post-GST regime. In case of part payment, sale may be recognized for the purpose of payment of sales tax/VAT to the extent payment is received.

Goods in transit may be subjected to sales tax/VAT even if such goods are received by the customer after the appointed day as the supplier would have charged sales tax/VAT at the time of supply under pre-GST regime, being in origin based tax system. It is possible that the goods involved in overlapping transactions, would cross check posts after implementation of GST and may be lacking in documentation requirement under GST. In such a situation reasonable time, may be allowed to complete the documentation and retain the taxability under pre- GST regime.

In case of sale on approval basis, GST may be charged if the customers approve such sale after the appointed day. Detailed rules/guidelines may be required to be framed in this regards.

Those contracts which are inclusive of taxes in pre-GST regime may be required to be bifurcated in taxable value and tax element separately under post-GST regime. The stock, work in progress etc., may be stated in these terms on the appointed day for smooth transition of credits.

In case of services, the existing Point of Taxation Rules may have to be reframed with necessary changes as may be required.

Branch transfers
In pre-GST regime the branch transfers are not taxable. Inter-state branch transfers, post-GST regime, may be liable for GST. The dealers may be required to give a declaration of stock lying at branch along with the component of tax thereon. For this purpose, the dealer’s warehouse or depot will also constitute a branch.

Carry forward and transfer of input credits
The transitional issue of input credit may arise in following circumstance when the goods purchased and lying in stock, which are sold post-GST including the tax exempt goods in post-GST regime upon removal of exemption.

Goods purchased from registered dealers and those remain in stock in trade on appointed day and sold in post-GST regime can further be classified into the goods with invoices showing the sales tax/VAT element separately and the invoices not showing sales tax/VAT so separately but are inclusive of such levies. In case of invoices inclusive of tax, some formula needs to be prescribed to find out the tax element in it. On the basis of some estimation like some percentage basis or as may be appropriate. Malaysia has adopted a general rule of element of 10% of taxes included in purchases for carry forward the tax element in post-GST regime or issue of refund in pre-GST regime if the assessee does not have authentic evidence.

But, what about excise duty involved in the goods lying in stock on the appointed day? There may be situations where the element of excise duty is visible on the ‘Tax Invoice’ and there may also be purchases lying in stock for which ‘tax invoices’ have been issued by resellers, thus excise duty is not shown separately, but included in the sale price (purchase price).

Goods purchased from unregistered dealers on which purchase tax is paid under the State law, the same may have to be allowed to carry forward in the GST regime under transitional provisions. The dealer may be allowed to carry forward only such input tax credit which is supported by adequate disclosure in the returns. In case of services, which have suffered reverse charge payment of service tax, the same should also be allowed to carry forward in post- GST regime.

Goods lying at branch or with agents, or with customers on approval basis, or in transit with invoices showing VAT /sales tax element separately or not which is inclusive of taxes. Credit of such tax or duty should be allowed to carry forward.

Refunds should be allowed in respect of goods or services lying in stock which was subject to tax in pre- GST regime but exempt in post – GST regime. Proper safeguards may have to be introduced to element goods/ services that have not suffered tax or duty due to purchases during basic or other exception periods.

Credit on semi-finished (under process) goods may be allowed on the basis of appropriate mechanism.

Credit in respect of capital goods – the assessee may be allowed to carry forward tax paid in pre-GST regime in relation to eligible capital goods lying in stock as having availed the credit including the deferred credit. In case of partial allowance of credit in the pre GST regime, the balance should be allowed to carry forward in post-GST regime.

No artificial restrictions may be imposed for the claim of input tax credit. No apportionment of input tax credit should be done when it can be attributed wholly to taxable supplies.

Credits forgone due to artificial restrictions should be allowed to be brought back. This should apply even for assessees hitherto paying under composition tax schemes under various laws.

Point of Taxation to avoid overlapping transactions
Different indirect tax laws in the country have different point of taxation. For example, in case of excise duty, the point of taxation is the time of removal from the place of removal of goods; In case of sales tax/VAT laws, the point of taxation is issuance of invoice and in case of service tax there is a separate mechanism called point of taxation. The GST law may have different rules for point of taxation which would determine the tax liability on supply of goods and services. The same set of rules should avoid double taxation on overlapping transactions under pre-GST regime and under post-GST regime. The instances of such overlapping transactions are given in the “Discussion Paper on Key Transitional Issues in Proposed GST Regime” issued by ICAI, and enumerated as follows:

i) Invoice is billed under pre-GST but the goods or services are supplied and consideration for the said supply made in the GST regime.

ii) Goods or services are supplied in the pre-GST regime but invoice for supply and consideration for supply made in the GST regime.

iii) Advance received during the pre-GST regime but invoice and supply made during the GST regime.

iv) Invoice and payment against the said invoice is received prior to GST regime but supply of goods or services is made in the GST regime. v) Invoice and supply of goods or services is made during the pre-GST regime but payment for the said supply is made in the GST regime.

vi) Payment is received in advance and supply of goods or services is made prior to GST regime but invoice for the said supply is made during the GST regime.

Sale of goods
In case of sale of goods, where the goods has already suffered levy of sales tax/VAT and is supplied in post-GST regime, it should be the differential rate of tax, i.e. rate of tax in GST less sales tax/VAT only be payable. In other words, the credit of sales tax/VAT paid should be allowed under the GST regime.

Provision of service
There may be situation where provision of service fall in both the pre and post GST regime. Presently, the conditions for levy of service tax are; a) provision of service, b) issue of invoices and c) payment of consideration. In GST regime only first two conditions are recommended. They should,

i) Where the service is completed in pre-GST regime and its invoice is also issued before implementation of GST, in such case, POT for the service would lie in pre-GST regime.

ii) In case a service is completed in post-GST regime or the invoice issued in case of service completed in pre- GST regime is issued in post-GST regime, the POT for the service would lie in GST regime.

iii) In case of continuing transactions like long term lease, license to use, hire purchase agreements, the agreements entered in pre-GST regime should be liable to GST from the appointed day for services provided from that day. In case full amount is paid in the pre-GST regime, the same should not be liable for GST for the remaining period of the transaction.

iv) In case of a contract of continuous supply of service made in pre-GST period but the same is cancelled subsequently, service tax paid for the terminated period may be refunded subject to the conditions as may be prescribed.

The above propositions will take care of the situation where a given service is taxable both in pre-GST as well as in the GST regime. In case where the given service is not taxable in pre-GST regime but has become taxable in GST regime or vice-versa, the criteria to determine the POT should be the date of ‘completion of service’.

Manufacture of goods
In case of a manufacturer of dutiable goods in pre-GST regime and removal thereof in GST regime, the point of taxation should be under GST regime.

Works Contract or other continuing transactions
Presently, under service tax, date of completion determines the point of taxation. However, in case of services continuing for a longer period of time like works contract, determination of date of completion of service may be done based on a criteria similar to the one in the Point of Taxation Rules, 2011, under the Service Tax Law in relation to ‘continuous supply of service’.

At the entry point of GST, from the current sales tax / VAT , it would be appropriate that value of the work done does not enter into GST regime and dual levy is avoided. The periodical RA bills issued and approved by the customer may be regarded as sufficient evidence. Similarly, there should be smooth transition of input credits of any tax, duty etc., lying in stocks or in unfinished works.

In case, any project (for e.g. infrastructure projects) are zero rated in GST regime the credits embodied in the stocks or work in progress should be refunded after putting in place adequate safeguard mechanism.

Real Estate transaction related to under construction properties
In case of under construction units, GST may be payable either on commercial properties or on residential properties or on both, the credit of input service tax, inputs and capital goods embodied in stocks or work in progress should be allowed in post-GST regime. Credit of tax paid on works contract service should be allowed when building is used for commercial/industrial purposes.

Exceptional scenarios
The law should also provide adequate provisions to deal with exceptional transactions like,

The transaction is under composition scheme under Pre-GST but not so under GST regime or vice versa.

Where property in goods has been transferred with option to return them within prescribed time frame given in pre-GST regime but are subsequently returned in post-GST regime; or

Where possession of goods has been transferred to job-worker to return within prescribed time frame given in pre-GST regime and are subsequently returned in post-GST regime; or

Where service provided in pre-GST regime is subsequently declared deficient in post-GST regime; etc.

Exempt goods and services in current regime, no longer so in GST and vice versa
Goods in stocks which has suffered input tax or services which has suffered input service tax should be allowed to be set off against GST payable on final output.

Ineligible credits (including that of CST inputs), on account of earlier exempt regime be allowed to be brought back in post-GST regime when they become taxable.

In long term contracts, sufficient time should be given to change the tender/contractual terms wherever necessary (e.g. in Malaysian GST, the existing contracts can be reviewed up to the first opportunity for such renewal or within the time limit of 5 years and till such review or expiry of time limit, such contracts are made zero rated). In case the contracts are not reviewable, GST may become cost to enterprise.

Treatment of unutilised credit in case the goods exempt in post-GST regime
Refund should be granted for unutilised credit provided the goods and services have suffered taxes before the appointed day. The assessee may be given option to carry forward the unutilised credit and set off against the tax payable under GST.

Conclusion
Success of GST depends largely on smooth transition of taxes and duties from pre-GST to post-GST regime. India has a complex system of taxes. There are various types of indirect taxes prevailing in the system with levies and exemptions that too vary State to State. Transitional provisions should be fair to the assessees and also it needs to be ensured that the prices do not escalate for the consumers. The best example is Malaysia which has joined band wagon of GST very recently, i.e. from 1st April 2015, after deliberating for more than 10 years. The country has introduced one of the fairest system of transition including allowance of refunds for taxes paid in pre-GST regime if levy becomes exempt later. Some other countries have also enacted appropriate provisions for smooth transition and allowance of hassle free credits in the new regime. Australia and New Zealand have separate transition Act. Singapore also has elaborate procedure and it has been ensured that smooth flow of credit is not artificially hampered. Elaborate procedure for allowance of refund is also formed whenever the supply is exempt in GST regime. It is expected that India will adopt a fair transitory process from existing levies to implementation of GST so that the businesses do not suffer and the interest of consumers is not affected by heavy terminal tax.

COPY OF MINUTES OF INTERACTIVE SESSION WITH THE OFFICIALS AS A PART OF VIGILANCE AWARENESS WEEK

fiogf49gjkf0d
OFFICE OF THE
PR. CHIEF COMMISSIONER OF INCOME TA X, MUMBAI
ADDL.COMMISSIONER OF INCOME TA X (HQ) (VIGILANCE)
ROOM N0.361, AAYA KAR BHAVAN, M.K. MARG, MUMBAI- 20

TEL- (022) 22011594
PABX- 22039131 EXTN. 2361

No. Addi.CIT(Vig.)/VAW/2015-16 / 392 December 07 , 2015

The Chief CIT- 1 to 11 & Central I & II, (IT) & (TDS)
The Director General of Income Tax (lnv.),
The CIT (Exemp), DTRTI, (I&CI) & (LTU)
The Addl. Director Generai(Vig.)(West)CBDT
The CIT Judicial, (Admn. & CO), (Audit)- I & II,
The CIT (DR) ITAT & ITSC
Mumbai.

Sir/Madam,

SUB : Observance of Vigilance Awareness Week- 2015 From 26.10.2015 to 31.10.2015-

Kindly refer to the above.

As a part of observance of Vigilance Awareness Week, an Interactive Session was held on 30.10.2015 at 11 .30 a.m. at Conference Hall, Aayakar Bhavan, Mumbai, with members of the BCAS, CTC, FICCI, WIRC(ICAI) etc. and Sr. Officers of the Department which was chaired by Pr. CCIT, Mumbai.

In this connection, I am directed to enclose a copy of minutes of the said Interactive Session for information & appropriate action.

Yours faithfully,
[ R. K. SINGH ]
Dy. Commissioner of Income Tax (HQ)
(Vigilance), Mumbai.

Encl.: as above.
Copy to (alongwith minutes of Interactive Session) :
(i) CTC, (ii) BCAS, (iii) FICCI, (iv) WIRC & (v) IMC
DCIT(HQ)(Vig.), Mumbai.

Minutes of the Interactive Session held on 30/10/2015 at 11.30 A.M. at the Conference Room, Aayakar Bhavan, Mumbai

An interactive session was held by the Income Tax Department, Mumbai in the Conference Room, Aayakar Bhavan, 3rd floor at 11 . 30 A.M. on 30.10.2015 as part of the endeavour to sensitize its officials to the need for lmproving quality of public service rendered and mitigating the potential areas of corruption during the Vigilance Awareness Week. The interactive session was chaired by Shri D. S. Saksena, Pr .CCIT, Mumbai. The following officers also participated in the Interactive Session:

2. The following members of Federation of Indian Chambers of Commerce and Industry (FICCI), Bombay Chartered Accountants ‘ Society (BCAS) , Indian Merchants’ Chamber (IMC) , Western India Regional Council of the Institute of Chartered Accountants of India (WIRC of ICAI) and Chamber of Tax Consultants (CTC) were present:

Federation of Indian Chambers of Commerce and Industry

• Mr. Deepak Mukhi, Head of FICCI – MSC

Bombay Chartered Accountants’ Society

• Mr. Raman Jokhakar, President, BCAS

• Mr. Ameet Patel, Co Chairman, Taxation Committee, BCAS

• Mr. Jagdish Punjabi, Convenor, Taxation Committee, BCAS

Indian Merchants’ Chamber

• Mr. Ketan Dalal, Chairman, Direct Tax Committee
• Mr. Gautam Nayak, Co-Chairman, Direct Tax Committee
• Mr. Sushil Lakhani, Member, Direct Tax Committee

Western India Regional Council of ICAI

• Mr. Shardul Shah, Regional Council Member

Chamber of Tax Consultants

• Mr. Avinash Lalwani, President

• Mr. Mahendra Sanghvi, Co-Chairman, Law & Representation Committee

• Mr. Krish Desai, Vice- Chairman, Law & Representation Committee

• Mr. Amrit Porwal- Convenor, Law & Representation Committee

• Ms. Nishta Pandya – Convenor, Law & Representation Committee

3. The Pr. CCIT(CCA) welcomed the participants and expressed his happiness on meeting the members from esteemed associations such as FICCI, BCAS, IMC, WIRC of ICAI and CTC. The Pr. CCIT remarked that each department has its own vigilance setup and in that process we have Addl. Director General (Vig.), West Zone. This is the formal structure in the department. The Pr. CCIT further informed that the refunds are being issued directly in the bank accounts of the assessee by CPC. However, we should have the system to safeguard the rights of the taxpayers to receive the refunds without coming numerous rounds to the income tax office. Therefore, the department wants to act positively and proactively by having interaction with the associations so that ideas can be shared and improvement in the systems and processes can be made.

4. Shri Deepak Mukhi of FICCI – MSC initiated the discussion by expressing his compliments for organising the meeting. He also thanked for circulating the minutes of the last years meetings and sorting out the grievances using the technology. He also suggested that whatever decision would be taken in deliberation should be followed up. Further, following issues/ suggestions were also made by FICCI –

(a) Proper monitoring and action by CCsIT is essential to ensure that Office Memorandum dated 7th November 2014 issued by CBDT regarding a non adversarial tax regime and other instructions are actually implemented at the ground level.

(b) There has to be adequate monitoring and supervision in relation to passing of assessment orders, so that the corruption possibilities could be significantly mitigated.

(c) In the assessment proceedings, Questionnaire should not be roving but shiould be ringfenced and specific. Also, the number of hearings should be restricted to a maximum of 5 hearing, which will compel tax officers to be specific and focused and will reduce the possibility to harass assesses. Further, notices for hearings must at least be delivered 20 days in advance and subsequent hearings should have minimum 3 weeks gap and each hearing not being more than 2-3 hours. In this regard internal guidelines may be issued.

(d) There have been a ‘large number of CBDT circulars, but several of them are not followed. In this regard internal guidelines may be issued. Issues such as non disposal of rectification orders, not giving effect to CIT(A) orders and non issue of appellate orders, for which CBDT has issued instructions, should be monitored strictly.

4.1 Shri Ameet Patel of BCAS appreciated the efforts made by the Department regarding issue of refunds, but added that the grievances relating to refund/ rectification are mainly due to the TDS-mismatch and lack of coordination between CPC and jurisdictional officer and that most of the problems are on account of nonmigration of PAN due to internal re-structuring of the Department. He also said that there was a lot of problems in giving the appeal effects in so many cases. Further, following suggestions were also made by BCAS –

(a) Wide publicity should be given to the Vigilance mechanism of the department. It is suggested that the same may be published in the journal of BCAS as well as having prominent notices within the premises of Income-tax offices at different places and not just at the main entrance, so that professionals as well as assesses are adequately aware of the vigilance mechanism of the department and they may approach the appropriate authority to redress their grievances.

(b) The process of rectifications, appeal effects, etc can be streamlined by giving acknowledgement numbers to applications and displaying on Notice Boards or on a website, the details of their disposal in timely manner. Likewise, the total number of assessments completed, demand raised and amount recovered, refunds issued, etc. in each Charge/Range may also be displayed or published on notice boards/ websites.

(c) Though corruption initiated by the officer gets often noticed and addressed through vigilance mechanism, the corruption initiated by an assessee does not get noticed. The officers should also be made aware of their duty to report such incidences for curbing corruption.

(d) In order to bring transparency in the process of delivery of notices to the assesses, the notices should also be sent in parallel by email.

(e) The Transfer & Posting policy needs to be adhered to by ensuring that officers with an adverse track record should not be posted in the charges having public contact and also no supervisory officer should be allowed to remain in one position beyond two years.

4.2 Shri Ketan Dalal of IMC made suggestion for issuing clarification/ guidelines regarding pre-assessment/ post-assessment proceeding like – directing AO’s not to issue142(1) mechanically but with application of mind and also to avoid passing high pitch assessment-order.

4.3 Shri Sushil Lakhani of IMC has conveyed that foreign companies have wrong perception about taxation departments in India and because of that they prefer to shift all the responsilities I liabilities pertaining to taxation matters to theirs Indian counterparts. Further, he also suggested that Income-tax Department of Mumbai, being major contributor to the exchequer, should show the way in this regard.

5. Shri B. K. Mishra, CCIT suggested that it is duty of the tax practitioners also to educate their clients and change their mindset to pay their legitimate taxes honestly in India, as lot of good things are happening in the Department which are not properly propagated.

5.1 Shri Abhay Charan Naik, CCIT suggested to provide specific case with PAN pertaining to Internationaltaxation regarding incidence of harassment, if any.

5.2 The Pr. CCIT informed the members present there about the vigilance set-up of the department. There is an established complaint handling mechanism in place in the Department in the form of vigilance set-up under Director General of Income-tax (Vigilance). The official website of the Department also provides detailed information about the vigilance set-up and complaint handling mechanism. He also informed about the display of notice boards in all the buildings of the department regarding the same.

6. Shri Raman Jokhakar of BCAS requested to put up the Charter of Demand on the website and also display at jurisdictional level.

6.1 Shri Shradul Shah of WIRC of ICAI suggested to call feedback from tax-payers and tax practitioners regarding functioning of the Department vis-a-vis assessments, refunds, rectifications and appeal effects etc.

6.2 Shri Ameet Patel of BCAS suggested to conduct awareness programme about the various initiatives taken by the Department for the benefit of the assesses in coordination with institutes/ associations like WIRC of ICAI/ BCAS/ IMC etc.

6.3. Shri Avinash Lalwani of CTC expressed that AOs are not properly maintaining the record of proceeding of assessment and suggested to maintain digital proceeding sheet. He also suggested that scanned copy of proceeding sheet should be uploaded in respective assessee’s account, to be accessible by the officers as well as assesses. Further, he pointed out that the ASK-Centres were not properly performing. Proper monitoring and reviews should be done by the Department in this regard. He also said that the certification of lowerI nil deduction of tax at source u/s 195 & 197 and disposal of rectification applications are not being done properly and that unnecessary and irrelevant information were asked for in this regard without first verifying the data available on the website of the Department. Regarding search and seizure proceedings, he said that the department insist the tax-payers to switch off the close circuit cameras while the proceeding were going on. He suggested that the CCTV should be remain on during the search action. He insisted that the department should video graphed the entire proceeding in order to ensure the transparency in the proceedings and avoid any sort of corruption. It was also suggested that due publicity should be given about the role of vigilance wing so that assesses are aware of such wing and approach the wing without fear.

7. The Pr. CCIT has informed the members to communicate such incidence, where malpractices are noticed, to the Department so the department could take necessary action against those officers/ officials.

7.1 Shri A. C. Naik CCIT-4 said that the Department is under the process of paperless office by using etechnology. There are lot of suggestions received in this respect which will be considered in on going project.

7.2 Shri Rakesh Mishra, Pr.CIT – 31, Mumbai has given the trail to take out light of E-Sehyog Project started on Pilot Project basis in the office of Pr. CIT 31, Mumbai. For that, he said that that notices from the Department would be sent to the assessee through mail and immediately after sending the mail, it would be deemed to be treated as served to the assessee. He suggested that the submissions made by the assessee through mail must be digitally signed so the evidentiary value & genuineness of the same can be ensured. He also suggested that the tax-payers and tax practitioners can meet higher authorities any time if they are having any genuine grievances with lower functionaries. He pointed out that every Wednesday forenoon has already been declared as a time for public meeting by the Central Government Department.

8. Shri Ketan Dalal of IMC – had said that the technology (E – SEHYOG) of Department by sending their e-mails etc should be implemented not only in assessment proceedings but in appellate proceedings also. He also insisted that the assessment, especially where substantial addition/ disallowances are made, should be finalized only after proper show-cause and after providing reasonable time to reply that show-cause.

8.1 Mr. Amrit Porwal of CTC has insisted that while proceeding with grievances, rectification applications, giving effect to the order of various appellate orders and issuing refunds, first the due procedure should be strictly followed in order to avoid any sort of corruption.

8.2 Shri Sushil Lakhani of IMC pointed out that proceeding under the section 148 initiated on the basis of information received from Sales Tax Department in the past two years has given wrong image to the Department because in such cases assessment has been completed mechanically and without application of mind.

9. Shri D. S. Saksena, Pr. CCIT, Mumbai said that the Department has no option but to initiate proceddings under Section 148, once such information is received, to verify the correctness of the information and assessments are being completed after doing proper verification from various agencies and documentary evidences brought on record.

9.1 Mr. Rakesh Mishra Pr. CIT- 31 provided his office email id and personal email id (Mumbai.cit31@incometax. gov.in & rakesh.mishra@incometax.gov.in respectvely) with a request to mail all the grievances/ suggestions etc related to his jurisdiction that is Goregaon and Jogeshwari. Accordingly the AO having jurisdiction over the case will look into the matter.

9.2 Shri S. S. Rana, Addl. Director General(Vig), West Zone informed that the grievances filed by the assessee or tax practitioners are dealt with by the Department in effective manner especially those which is filed through ASK or CPGRAMS. Problems arise with those grievances only which the assesssee file directly with AO’s. He suggested that the assessee and tax practitioners should file all the grievances through ASK or CPGRAMS only and also they should inform higher authorities from time to time regarding pendency of grievances. Regarding high pitch assessment, they should meet higher authorities or may seek direction u/s 144A from the range head the moment show – cause is issued to the assessee by the AO. He suggested that the tax practitioners as well as assessee should avoid to follow any grievance I obligation directly with the staff members and call the AO’s and instead of that it should be rooted through ASK. He also said that the tax practitioners should also follow the rules and explain true facts and legal position to the tax-payers instead of misguiding and frightening them.

9.3 The Pr. CCIT responded to the participants by informing the members present there that the guidelines have been laid down in the Charter of Demand to tackle all the issues within the time limit as prescribed therein. He pointed out that many of the complaints are anonymous or pseudonymous and there is general reluctance of complainants revealing their identity. Unless there is a specific information that can be acted upon, anonymous and pseudonymous complaints do not help in mitigating the menace of corruption. Issue regarding further publicity about the vigilance set-up and complaint handling mechanism would be considered.

He further informed the Members that necessary guidelines were already issued in respect of issuing questionnaire for scrutiny assessment cases. If the assessing officer issues questionnaire in routine manner, the same should be brought into the notice of higher authorities. In response to the dissatisfaction expressed by members of various CA Associations in respect of functioning of Aayakar Seva Kendra, the Pr. CCIT has stated that the Department will look Into the various aspects as suggested by members of CA Associations.

As regards the display of information or publicity in respect of additions made in income tax assessment, he remarked that secrecy of the assessee’s information is important and cannot be violated. Being policy matter and also for the sake of uniformity, issue relating to publicity of addition/ disallowances made while finalizing the assessment could be addressed by the CBDT only.

10. It was requested by the members of the Associations to send Minutes of the Meetings to all the associations so that common thread is maintained for future purpose.

11. The participants agreed on the need for greater co-ordination between the department and the professional bodies to improve the quality of tax administration and to help each other to ensure that the officers of the Department and the tax practitioners would work towards creating a transparent and vigilant environment. The group deliberated on the challenges and opportunities present before the Income Tax Department and agreed that the education of the tax payers on their rights and duties require immediate attention. The Pr.CCIT assured the group that they would continue to meet and discuss areas of concern and consider the suggestions made to ensure transparency and accountability. The interactive session was concluded on the positive note that the Department and all the stake holders would co-operate to ensure that the tax administration is fair and just.

(AJAI PRATA P SINGH)
Addl. Commissioner of Income Tax(HQ)
(Vigilance), Mumbai.

Section 271(1)(c) – Where assessee’s claim for deduction under section 80-IB was rejected for not satisfying conditions u/s. 80-IB(7A), penalty u/s. 271(1)(c) was not leviable

fiogf49gjkf0d
CIT vs. Rave Entertainment (P.) Ltd. SLP No 16002/2015 dated
07/09/2015 (Afirmed Rave Entertainment (P.) Ltd. vs. CIT (2015) 2015 376
ITR 544 (All.)(HC)

The assessee claimed deduction u/s.
80-IB. The claim was rejected by the Assessing Officer. At the same
time, the Assessing Officer had opined that the assessee had wrongly
made the above claim which amounted to concealment of income, so he
levied the penalty u/s. 271(1)(c). It was held by the Hon. High Court that in the audit report in Form 10CCBA relevant to the assessment year 2006-07 also the date of completion of construction has been mentioned as 1-5-2002, falling in the assessment year 2003-04. On the basis of these facts, there was a strong justification for the assessee to claim exemption u/s. 80-IB(7A) in the assessment year 2006-07, as it was the fourth year and the benefit is available for five consecutive years beginning from the initial assessment year. The fact about the completion of construction as noted by the Commissioner (Appeals), supported by the audit report, remained undisputed at the stage of the Tribunal. Therefore, the assessee cannot be visited with the charge of filing inaccurate particulars, on the basis of which penalty u/s. 271(1)(c) has been levied by the Assessing Officer.

The Assessing Officer has only stated that such claim was not allowable as the conditions envisaged u/s. 80-IB(7A) were not fulfilled. Thus, the claim was found to be legally unacceptable but it does not amount to furnishing of the inaccurate particulars/concealment of income. It is a simple case of non-allowance of the legal claim for which the penalty is not desirable. Hence, penalty order was set aside by the Hon’ble High Court .

Revenue filed an SLP against the Order of Hon’ble Allahabad High court, which was dismissed.

Section 80IB Deduction – 100% export oriented undertaking – Duty drawback receipt, duty drawback receipt not derived from industrial undertaking –

fiogf49gjkf0d
Arvind Footwear (P.) Ltd. vs. CIT, SLP NO. (CC) 10365/2014 dated 4/8/2014: (Allahabad High court order dated 17/1/2014 100 DTR 425) (Reversed : Arvind Footwear (P.) Ltd. vs. Dy.CIT, Range -6, Kanpur [2013] 153 ITD 264 (Luck))

The assessee claimed that the “duty drawback” receipt of Rs.1.53 crore was eligible for deduction u/s 80-IB on the ground that the said duty drawback refund was a refund of customs and central excise duty on inputs used in manufacturing of its products. The AO & CIT(A) rejected the claim by relying on Liberty India 317 ITR 218 (SC) where it was held that duty drawback was not “derived” from the industrial undertaking.

The Tribunal observed that though in Liberty India it was held that duty drawback and DEPB arises from an independent source and is not “derived” from the industrial undertaking, in Dharam Pal Premchand 317 ITR 353 (Del) (SLP dismissed) it was held that refund of excise duty had a direct nexus with the manufacturing activity & was eligible for section 80-IB deduction. Accordingly, though duty drawback & DEPB were held in Liberty India to be an independent source of income and to not have a “first degree” nexus with the undertaking, this was in the context of a fact-situation where the duty drawback & DEPB did not arise from core activities of the undertaking and was an additional, ancillary or supplemental profit. There can be situations in which duty drawback itself could be more than the overall profits and in such situations, the duty drawback may not be seen on standalone basis or as an independent source of income because the overall profit is only a part of the duty drawback receipt, and the commercial motivation of running the industrial undertaking is earning only that part of duty drawback receipts. On the present facts, the duty drawback was more than the entire operational profit and so there cannot be an open and shut inference that the duty drawback receipts are an independent source of income and have no first degree nexus with the business activity of the industrial undertaking. There is still room for consideration of the plea that but for the duty drawback the assessee would not have carried out the business activity in the industrial undertaking, because, that would have meant carrying out business for incurring losses. If that be so, the duty drawback receipts can be said to derived from the undertaking and to be eligible for section 80-IB deduction. The Tribunal therefore remitted the matter for fact finding.

The Hon’ble Allahabad High Court reversed the decision of the Tribunal, holding that the issue stood concluded by a decision of the Supreme court and therefore the remand was not proper. On SLP being filed by the assessee, the same was rejected.

Section 68 – Share Application Money & Unsecured loan from family members of directors – Unexplained cash credits

fiogf49gjkf0d
Earthmetal Electrical Pvt. Ltd. SLP allowed by Supreme Court Civil Appeal No. 618 of 2010 dt. 30/7/2010 (Bombay High court order Appeal No 590 0f 2005 dt 15/10/2008 and Mumbai Tribunal order (2005) 4 SOT 484 (Mum.) reversed)

The Assessing Officer, having found certain share capital money and unsecured loan in the books of account of the assessee-company directed the assessee to explain the share capital money as well as unsecured loan. In response to the Assessing Officer’s query, the assessee submitted confirmation and disclosed that share capital and unsecured loan had been taken from the family members of the directors. The Assessing Officer, having noted that the alleged confirmation did not contain the necessary details, issued notice u/s. 133(6) to all those persons who had allegedly contributed to the share capital of the assesseecompany as well as given unsecured loan. In response to the notice, no one gave any reply. The Assessing Officer also procured information u/s. 131 from the bankers and compared the transaction from information gathered from bank but could not co-relate them. He then issued notice to the assessee, but the assessee never appeared before the Assessing Officer. The Assessing Officer, therefore, treated the share capital money and unsecured loan as unexplained cash credit falling u/s. 68 and, accordingly, made addition to the income of the assessee. The ITAT Mumbai and Hon’ble Bombay High Court confirmed the order of A.O.

The Hon’ble Supreme Court allowed the SLP filed by the assessee following the Supreme Court in case of CIT vs. Lovely Exports (P) Ltd. (2008) 216 CTR 195 / (2008) 6 DTR 308 held that, if the share application money is received by the assessee company from alleged bogus shareholders, whose names are given to the A.O., then the department is free to proceed to reopen their individual assessments in accordance with law, but it cannot be regarded as undisclosed income of the assessee company.

Section 2(47) r.w.s. 48 – Redemption of preference shares amounts to transfer within meaning of section 2(47) – Held Yes – Assessee would be entitled to benefit of indexation

fiogf49gjkf0d
CIT vs. Enam Securities P Ltd SLP no (CC) 38542/2012 dated 1/9/2014. (Affirmed CIT-4 vs. Enam Securities (P.) Ltd. [2012] 345 ITR 64 (Bom.))

The assessee was engaged in business of share broking and also dealing in shares. It had purchased 4 lakh preference shares of Rs. 100 each from a company ‘E’. The preference shares were to carry a dividend of four per cent per annum and were redeemable after the expiry of ten years from the date of allotment. During the course of assessment year 2001-02, the assessee redeemed three lakh shares at par and claimed a long-term loss after availing of benefit of indexation. The Assessing Officer disallowed the claim of set off of long-term capital loss that arose on redemption against long-term capital gain on the sale of other shares on the grounds that – (i) both the assessee and the company in which the assessee held the preference shares, were managed by the same group of persons; (ii) that there was no transfer; and that the assessee was not entitled to indexation on the redemption of non-cumulative redeemable preference shares. On appeal, the Commissioner (Appeals) allowed the claim of the assessee. On further appeal, the Tribunal affirmed the view of the Commissioner (Appeals) holding that the genuineness and credibility of the capital transaction was not disputed for the previous ten years. It was further held that both the companies were juridical entities; that the fact that the companies were under common management would not indicate that the transfer was sham. It was also held that since redeemable preference shares were not bonds or debentures, the assessee would not be deprived of the benefit of indexation u/s. 48. The Hon’ble Bombay High Court Upheld the Order of Tribunal. On SLP being filed by Revenue, the same was dismissed.

2016 (41) STR 183 (Chattisgarh) CCE & C., Raipur vs. General Manager, Telecom District, BSNL

fiogf49gjkf0d
If both the parties have preferred appeal, the Tribunal should pass a reasoned and speaking order and should discuss reason of acceptance of one appeal and rejection of appeal of another.

Facts
Appeal before the Tribunal was made by both i.e. the assessee and the department against the order of Commissioner. The Tribunal considered and discussed the contentions of the assessee only and no consideration or discussion was made whatsoever of the appeal filed by the department.

Held
Though both the appeals were disposed of, there was no discussion on department’s appeal while allowing the appeal of the assessee. Consequently, the matter was remanded back to the Tribunal to pass a reasoned and speaking order after hearing both the parties and without taking into consideration the earlier order passed by the Tribunal but discussing both appeals and the reasons for acceptance of one and the rejection of the other.

2016 (41) STR 11 (Bom) Quality Fabricators and Erectors vs. Dy. Dir. DGCEI, Mumbai

fiogf49gjkf0d

Demand alleged to be due as per SCN without its adjudication cannot be recovered by issuing notice to banks and debtors

Facts
On the basis of investigation, a Show Cause Notice (SCN)was issued which was replied to by the Appellant denying the allegation. Without giving an opportunity of personal hearing and passing the adjudicating order, recovery proceeding was initiated by sending account freezing notices to banks. On initiation of said action, partial service tax was deposited and the said action was challenged before the High Court.

Held
The High Court observed that until and unless there is crystallisation of demand by proper adjudication, recovery action cannot be initiated when all allegations were denied in the reply filed. Accordingly, the recovery notices were set aside.

2016(41) STR 3 (All) Kunj Power Project Pvt. Ltd. vs. Union of India.

fiogf49gjkf0d
The action of attaching bank accounts without giving opportunity of hearing is gross violation of prescribed rules and such order is required to be quashed

Facts
The Appellant engaged in fabrication, erection and installation of power sub-stations availed CENVAT credit for discharging service tax. The Respondent during an enquiry gave an oral direction to reverse the credit which was not adhered to. Therefore, a Show Cause Notice was issued. Before submission of the reply, bank accounts were attached and this action is challenged before the High Court.

Held
The High Court observed that while proceeding for attachment of property, procedure specified in Service Tax (Provisional Attachment of Property) Rules, 2008 and C.B.E. & C. Circular No. 103/6/2008-S.T. dated 01/07/2008 should be followed. It was further noted that as per Rule 3(2) of the said Rules, prior notice is required to be given specifying the reasons for initiation of action of attachment and details of property to be attached and opportunity for hearing is required to be provided within 15 days from service of notice. Since the Respondent has failed to issue such notice and grant an opportunity of hearing before attaching the accounts and also no cogent reasons were provided justifying the said action, the order attaching bank accounts was quashed and cost of Rs.25,000/- was ordered to be paid to Appellant.

2016 (41) STR 168 (Mad) CCE, Chennai- III vs. Visteon Powertrain Control Systems (P) Ltd.

fiogf49gjkf0d
CENVAT credit of outdoor catering services, cost of which is borne by the assessee, shall be allowed for the period upto 31st March, 2011.

Facts
CENVAT credit was availed on outdoor catering services provided in the factory premises to its employees during the period prior to 1st April, 2011. The department contended that the service could not be treated as “input service” as it was neither used in or in relation to manufacture or clearance of final product nor is an activity relating to business. Adjudicating authority allowed CENVAT credit considering the services to be in relation to manufacture. Following Larger Bench decision in GTC Industries Ltd. 2008 (12) STR 468 (Tri.-LB), the Tribunal in the department’s appeal allowed CENVAT credit considering the services to be relating to business. In some cases, the Tribunal relied upon the Hon’ble Supreme Court’s decision in Maruti Suzuki Ltd. vs. CCE 2009 (240) ELT 641 (SC) and disallowed CENVAT credit. The department argued that Notification No. 3/2011-ST dated 1st March, 2011 has substituted the definition of input service and therefore, should be applied retrospectively and therefore outdoor catering services were excluded from the definition of “input service” even for the period prior to such substitution. Relying upon Bombay High Court’s decision in Ultratech Cement Ltd. 2010 (260) ELT 369 (Bom), the Appellants pleaded that CENVAT credit be allowed on the ground of mandatory statutory requirement to provide canteen facility to employees. It was also argued that the effective date of notification was 1st April, 2011 only and therefore, for prior period, CENVAT credit should be available.

Held
All contentions raised by the revenue have been elaborately considered by the Bombay High Court in case of Ultratech Cement Ltd. (supra), including Hon’ble Supreme Court’s decision of Maruti Suzuki Ltd. (supra), wherein CENVAT credit was allowed except in case the cost of food is borne by the employee. Further the plea of retrospective application of exclusion to definition of “input service” was rejected on account of amendment clearly specifying the date of its enforcement to be 1st April, 2011. Thus, relying on the aforesaid decisions CENVAT credit on outdoor catering services prior to 1st April, 2011 was allowed.

Inter-State Transfer for Job work vis-à-vis Requirement of ‘F’ forms

fiogf49gjkf0d
Introduction
Section 6A of Central Sales Tax Act, 1956 (CST Act) requires that, if there is any inter-state transfer to branch or agent or principal, as the case may be, then ‘F’ form is required to be obtained from transferee. If such form is not obtained, it will be deemed to be inter-state sale for all purposes of CST Act.

Section 6A refers to inter-state branch transfer or to agent/ principal (collectively referred to as ‘branch transfer’). However, in addition to branch transfer of stock, there is also inter-state branch transfer for job work. Like, a dealer in Gujarat may send his goods for processing to its job worker in Maharashtra. Job worker will complete the processing and send processed goods to its employer i.e. the dealer who had sent him goods for process.

In this case, there are two transfers, one from Gujarat to Maharashtra and again from Maharashtra to Gujarat.

Difference between Branch Transfer and Job Work Transfer
The stark difference between branch transfer and job work transfer is that the branch transfer is to oneself. However, in case of job work transfer the transfer is to independent job worker. The relationship is of principal to principal and job worker charges its own processing charges for the same. In other words, the relationship in job work transactions is like seller and buyer. If any goods are involved in the process, which gets transferred to principal then job worker may be liable to discharge works contract liability on such processing charges.

Though ‘F’ form is required for inter-state branch transfers, it was not contemplated in relation to job work transfer. In fact the Commissioner of Sales Tax, Maharashtra State has issued circular bearing no.16T of 2007 dated 20.2.2007 explaining the above position and stating that F forms not required for job work transfers.

Judgment of Hon. Allahabad High Court in case of Ambica Steel Ltd . (12 VST 216)(All).
The requirement of obtaining of F forms again came in light when the Hon. Allahabad High Court had an occasion to decide a similar issue. In that case, the dealer challenged the requirement of ‘F’ forms for job work transfer.

The Hon. Allahabad High Court ruled that F forms are necessary for job work transfer and also upheld validity of the requirement.

The Commissioner of Sales Tax, Maharashtra State, again issued circular bearing no.5T of 2009 dated 29.1.2009 reiterating its earlier view that inspite of above judgment of the Hon. Allahabad High Court, legally F forms are not required for job work transfer.

However, M/s. Ambica Steel Ltd. went to the Supreme Court against the Allahabad High Court judgment. In the Supreme Court, the dealer did not contest the legality of requirement of F forms as per section 6A but got case remanded back on premises that it will be producing forms before assessing authority.

The Hon. Supreme Court accordingly disposed of the matter vide judgment reported in case of Ambica Steel Ltd. (24 VST 356)(SC).

Based on the above Supreme Court judgment, the Commissioner of Sales Tax, Maharashtra State, again issued circular bearing no.2T of 2010 dated 11.1.2010 withdrawing earlier circulars and advising for obtaining ‘F’ forms for job work transfers also. One more circular bearing no.12T of 2010 dated 22.3.2010 was issued stating that the withdrawal is prospective i.e. from 11.1.2010.

Based on the above circulars, the sales tax authorities have started levying tax under CST Act when F forms are not available for inter-state job work transfers.

The Bombay High Court on the above issue
Based on one such assessment order, the issue was contested before the Hon. Bombay High Court in case of Johnson Matthey Chemicals India Pvt. Ltd. vs. State of Maharashtra (W.P.No.7400 of 2015 along with W.P.No.7934 of 2015). The said writ petition was decided vide judgment dated 16.2.2016.

The facts in case of this writ petition are narrated by the High Court as under:

“4) The Petitioner holds a registration number as set out in para 4 of the Petition. It is claimed that the Petitioner is manufacturer and job worker, engaged in the manufacture of different grades of support catalyst, including activated charcoal support. It is stated that this is predominantly a process resulting in the production of recharged catalyst from spent catalyst. It is stated that the Petition relates to job work transactions. The Petitioner receives a specified quantity of spent catalyst from its customers from within as well as outside the state of Maharashtra. The Petitioner undertakes job work of converting the spent catalyst received from the customers into support catalyst and sends back the recharged support catalyst to such customers.”

The basic arguments of the petitioner were as under:
i) The intention of insertion of section 6A was to refer to branch transfers, as there were chances of evasion.
ii) Only branch transfers are covered by Section 6A as clear from language used in section 6A.
iii) No provision in Act/Rules to obtain ‘F’ forms where transactions are between principal to principal.
iv) Section 6A(1) will operate when there is actual interstate sale and failure to bring F form, and not otherwise.
v) Section 6A will aid section 6 to levy tax on otherwise completed inter-state sale, but not otherwise.

The Respondents argued that section 6A applies to all non sale inter- state movements and it is merely rule of evidence.

Having noted arguments from both sides, the Hon. Bombay High Court has concurred with the judgment of the Allahabad High Court in case of Ambica Steel Ltd. (12 VST 216)(All). The observations of the Hon. Bombay High Court are as under:

“46) We do not think that there is any ambiguity in the legal position. Further, we do not see anything ambiguous or vague in the circular issued by the State of Maharashtra after this judgment in the case of Ambica Steels Limited (supra) by both, the Allahabad High Court and the Hon’ble Supreme Court of India. We are of the firm view that furnishing and scrutiny/verification of the declaration in that form is a requirement in law and if that is fulfilled, the burden on the dealer is taken to be discharged. If that declaration is not furnished, then, the consequences follow. The goods might have been dispatched for job work and not as and by way of sale, but that is the plea or case of the dealer. If that is the case and the burden is on him to prove it, then, he has to obtain the declaration. If the declaration is not being issued by some States in the form prescribed, namely form ‘F’ and the dealer made all the efforts to obtain it but failure to produce it is not his fault, then, he may, as the Hon’ble Supreme Court of India clarifies, request the Assessing Officer to take that circumstance into consideration. If that request is made, the Assessing Officer can, depending upon the facts and circumstances of a particular case, pass such orders as are permissible in law. Therefore, we do not agree that the circular of 2010 misinterprets the order of the Hon’ble Supreme Court of India. It neither misreads nor misinterprets the judgment of the Allahabad High Court.

Throughout ,the understanding is that the burden is on the dealer and he has to discharge it in the manner prescribed in law. If the burden has to be discharged in the manner set out, then, no other mode or manner is permissible. Therefore, all that the Hon’ble Supreme Court clarifies is that if some States are not issuing ‘F’ form, then, that approach of a particular State should be brought to the notice of the Assessing Officer in the dealer’s State. That the Assessing Officer should be convinced that the dealer made all efforts, but for no fault of his, he could not obtain the ‘F’ form. Thereupon and pursuant to the liberty given by the Hon’ble Supreme Court of India and the dealer raising the plea, the Assessing Officer, while taking note of it, would consider the peculiar facts and circumstances and may pass requisite orders.

Even that is not the rule but an exception. The requirement is not displaced necessarily and as urged. We do not, therefore, see any merit in the contentions of Mr. Sridharan and while challenging the circular of 2010.” (underlining ours)

TRANSFER OF USE OF INTANGIBLES: IS RIGHT TO USE ALWAYS TRANSFERRED?

fiogf49gjkf0d
Introduction:
Intangible or incorporeal rights such as patents, trademarks, computer software etc. are characterised as goods. It was observed in Vikas Sales vs. Commissioner of Commercial Taxes (1996) 102 STC 106 (SC) that since incorporeal rights are capable of transfer and transmission they are movable property and therefore included in the ambit of goods. In Commissioner of Sales Tax vs. Duke & sons Pvt. Ltd. (1999) 112 STC 370 (Bom), upholding applicability of sales tax, the Court held, “the manner of transfer of the right to use the goods to the transferee would depend upon the nature of the goods…… For transferring the right to use the trademark it is not necessary to handover the trademark to the transferee or give control and possession of trademark to him, it can be done merely by authorizing the transferee to use the same in the manner required by the law as has been done in the present case. The right to use the trademark can be transferred simultaneously to any number of persons” Also in SPS Jayam & Co. vs. Registrar, Tamil Nadu Taxation Special Tribunal & Others (2004) 137 STC 117, it was held that trademark is intangible goods which is subject matter of transfer. Giving permission to use trademark for a particular period while also retaining this right to use such trademark for self-use or to be able to grant license to some other person simultaneously is only a transfer of right to use and not merely a right to enjoy. It was observed that simply by retaining the right for oneself to use the trademark while granting permission to others to use the trademark, it would not take away the character of the transaction as one of transfer of right to use. This view was also echoed by the Andhra Pradesh High Court in G.S. Lamba & Sons vs. State of A.P. 2012-TIOL-49-HC-AP-CT that levy of tax under Article 366-(29A)(d) of the Constitution of India is not on the use of goods but on the transfer of right to use goods which accrues only on account of transfer of such right. Transfer of Right is sine qua non for the right to use any goods and such transfer takes place when a contract is executed under which the right is vested in the lessee. G.S. Lamba (supra) however involved providing tangible goods on hire.

Nevertheless, considering a significant tax potential in the transactions involving intangible goods, the Central Government incorporated section 66(55b) in the Finance Act, 1994 from September 10, 2004 in terms of which “intellectual property service” was defined as one which means a) transferring whether (permanently or otherwise) amended from 16/06/2005 as temporarily or (b) permitting the use or enjoyment of any intellectual property right”. This category of service in its new version under the negative list based taxation in force from 01/07/2012 appears as declared service in section 66E(c) as “temporary transfer or permitting the use or enjoyment of any intellectual property right.”

At this point, it must be noted that mutual exclusivity of VAT and service tax has been envisaged in Imagic Creative P. Ltd. vs. CCE 2008 (9) STR 337 (SC) by the Supreme Court. So also, in Bharat Sanchar Nigam Ltd. & Anr. vs. UOI & Others 2006 (2) STR 161 (SC), it was held that value of service cannot be included in the sale of goods or the price of goods in the value of service. Further, in the case of Bharat Sanchar Nigam Ltd. (supra), a test was laid down to determine whether a transaction is for transferring right to use goods as provided below:

“Para 97
To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes:

(a) There must be goods available for delivery;

(b) There must be a consensus ad idem as to the identity of the goods;

(c) The transferee should have a legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

(d) For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statue – viz. a “transfer of the right to use” and not merely a license to use the goods;

(e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others”. (emphasis supplied)

Thus the test of exclusivity is laid down by the Supreme Court. This criteria is followed in a large number of decisions. However, the Courts have distinguished in a few others leading to a controversy whether the transaction involves transfer of right to use and thus a deemed sale liable for sales tax/VAT tax or a service liable for service tax.

Key Rulings of the Courts: Test of Exclusivity
In the case of Nutrine confectionary Co. Pvt. Ltd. vs. State of Andhra Pradesh (2012) 21Taxmann.com 555 (Andhra Pradesh), the petitioner allowed the right to use a trademark on non-exclusive basis, against payment of royalty. The dispute related to whether or not there was transfer of right to use goods. Relying on State of Andhra Pradesh vs. Rashtriya Ispat Nigam Ltd. (2002) 126 STC 114 (SC) it was observed that ‘assignee’ was free to make use of the trademark and logo and had full control over such use. The petitioner did not in any manner regulate the use of trademark or logo by the assignee and also used trademark for its own use. These facts did not mitigate in favour of the petitioner. Distinguishing the BSNL’s case, the Court observed, “BSNL dealt with a case of mobile connections. It is not a case of transfer of trademark or logo. The contract for providing a mobile connection invariably contains a clause that the licensee shall use a mobile connection exclusively for himself/herself and nobody else would use. In the case of trademark, the same can be used by an assignee without any exclusive right. This itself does not remove the transaction under the agreement outside the purview of section 5E” and therefore liable for sales tax (VAT). (Note: Section 5E of the GST Act overrides all other provisions of the said Act when it is the case of transfer of right to use any goods). Not in line with this, a Division Bench of Kerala High Court in Malabar Gold Pvt. Ltd. vs. Commercial Tax Officer (2013) 35 Taxmann. com 569 (Kerala) while analysing an agreement for franchise followed the dictum of Bharat Sanchar Nigam Ltd.’s case (supra) after considering various cases including Rashtriya Ispat Nigam (supra), Duke & Sons Pvt. Ltd. (supra), SPS Jayam & Co. (supra) and even the above Nutrine’s case (supra). In this case, the assesse engaged in the business of marketing, trading etc. of gold and diamond jewelery under the brand “Malabar Gold”, received royalty under a franchise agreement containing various clauses including permitting the use of trademark. The assessee paid service tax on royalty receipts under franchise service. The VAT department considering the use of trademark as transfer of right to use trademark demanded VAT . The clauses in the franchise agreement were examined in detail by the Court. In spite of the revenue’s heavy reliance interalia on the above Nutrine’s case (supra), the facts were distinguished observing that Nutrine’s case was decided because of applicability of section 5E of the Andhra Pradesh General Sales Tax Act and the Court held that the test laid down in BSNL’s case (supra) squarely applied as there were no deliverables at any stage and the right was not transferred to the exclusion of the franchisor, who could transfer the same right simultaneously to others and thus the test laid down in BSNL judgment was not satisfied. The Court also distinguished two earlier decisions of Kerala High Court itself viz. Jojo Frozen Foods Pvt. Ltd. vs. State of Kerala (2004) 24 VST 327 (Ker) and Kareem Foods Pvt. Ltd. vs. State of Kerala (2009) 24 VST 333(Ker.) on the ground that in these cases, there was no occasion to consider either Entry 97 of LIST-I under the 7th Schedule of the Constitution or the service tax provision u/s. 65(105)(zze) of the Finance Act,1994 in respect of franchise service brought in the law from 2003, as the cases were of pre-2003 period and service tax is correctly paid as the transaction is of franchise service. Yet in another case relating to franchise viz. Vitan Departmental Stores & Industries Ltd. vs. The State of Tamilnadu 2013-TIOL-897-HC-MAD-CT, the agreement related to granting exclusive right to operate departmental store for a specified period. The High Court held that the transaction was not a mere license or mere right to enjoy but a transfer of right to use intangible goods as the right was provided to operate the store on exclusive basis. In a recent decision of Tata Sons Limited & Another vs. The State of Maharashtra 2015-TIOL-345-HC-MUMCT, the decision in Bharat Sanchar Nigam Ltd. (supra) was distinguished observing that the controversy dealt with in this case related to telephone service and not similar to issue of trademarks and held that in relation to intangibles such as trademarks, the transfer of right to use need not be exclusive and unconditional and such transaction is capable of multiple transfers and transferor continuing to use goods such as trademarks would constitute sale exigible to the State value added tax.

Thus the question that arises is whether the test laid down by the Supreme Court in BSNL’s case (supra) is required to be followed even in the case of intangible goods or whether it applies only to the transfer of right to use tangible goods and distinguishable for determination of transfer of right to use intangible goods. Consequently, the issue is whether it is simply on account of the inherent nature of the intangible goods which allows simultaneous use by multiple persons that a transaction cannot be treated as sale or simply because the service tax law now contains provisions to tax the transaction as ‘service’, the transaction is held as service and not as deemed sale. In this context, it is apposite to discuss one more decision in AGS Entertainment Pvt. Ltd. vs. Union of India 2013 (32) STR 129 (Mad) wherein validity of provisions of section 65(105)(zzzzt) of the Finance Act,1994 (dealing with the service of temporary transfer or permitting the use or enjoyment of any copyright) was examined. In this case, a service provided by producer/distributor/exhibitor was challenged on the ground that transfer of right to use the goods amounted to sale and not service. The High Court followed BSNL’s case (supra) to contend that ”the temporary transfer of copyright did not satisfy principles laid down in BSNL’s case (supra) and it is neither a sale nor a deemed sale. Service tax is a levy on “temporary transfer” or “permitting the use or enjoyment” of the copyright as defined under the Copyright Act, 1957. In the case of Sales Tax Act, there would be “transfer of right to use goods” whereas under the Service Tax Act what is levied is temporary transfer/ enjoyment of the goods. The pith and substance of both enactments are totally different. “Temporary Transfer” or “permitting the use or enjoyment of the copyright is not within the State’s exclusive power under Entry 54 of List-II.”

Conclusion:
The issue thus remaining open is whether the test of exclusivity laid down in BSNL’s case is applicable to intangibles or is the decision distinguishable for transfer of right to use intangibles. Also whether there is a difference between granting permission to use and transfer of right to use. If transfer of use necessarily involves transfer of right to use whether the goods are tangible or intangible, the levy of service tax has no place. When any of the matters reaches Supreme Court, it would have to decide these issues among others. In the interim, the Courts would have other cases to decide with new perspective to the controversy when the facts are different and therefore in spite of paying one of the two taxes, the assessee may have to face litigation initiated by the other authority.

Welcome GST VAT (GST) in the European Union (Part II)

fiogf49gjkf0d
[This is the second and concluding part of write up on VAT in the European Union (‘EU’)]

The previous write up discussed the background of Value Added Tax (‘VAT’) regime currently in force in the European Union (EU). It briefly described inter alia the authority and scope of the tax, the internal coordination between various Member States, the value added tax principles and the mechanics of tax regime. The current write up deals with some important concepts and procedural aspects of the EU VAT .

Branch Transfer (also known as intra-community acquisitions):

Generally, a transfer of goods between branches of the same legal entity (i.e. transfer of goods from a factory to a warehouse owned by the same company within the same Member State) is not considered as a supply for VAT purposes. However, this general rule will not apply in situations where an entity transfers its own goods across borders within the EU. Such transfers are also known as intra-community supplies / acquisition. A taxable person is deemed to make an intra-community supply and an intra-community acquisition if the person transfers goods between different parts of a single legal entity located in different Member States. In such cases, the transferring entity may need to register for VAT in both i.e. the Member State of dispatch and the Member State of arrival. Member States are authorised to prescribe their own registration requirement and business entities need to refer to the relevant Member State’s requirements before transferring goods across borders.

Exceptions to the above (Transfers deemed not to be acquisitions).
It is pertinent to note that not all intra-community movements of own goods are treated as acquisitions.The following cross border transfers are not treated as intracommunity transfers:

Goods to be installed or assembled for a customer in another Member State
Goods transported to another Member State under the distance selling rules
Goods meant for export outside the EU from another Member State or dispatched to another Member State (i.e. the goods are temporarily transferred from one Member State to another and thereafter exported from the second Member State)
Goods sent to another Member State for processing (provided that the goods are returned after processing)
Goods temporarily used in another Member State for a supply of services made there
Goods used temporarily (i.e. for less than two years) in another Member State

Taxable person:
The EU VAT directive defines ‘Taxable person’ to mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity. Such a person may be an individual, partnership, company or other forms of business which supplies taxable goods and services in the course of business.

Economic activity conducted ‘independently’ shall exclude activities of employee and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.

Exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis is regarded as an economic activity. In addition to this, any person who, on an occasional basis, supplies a new means of transport, which is dispatched or transported to the customer by the vendor or the customer, or on behalf of the vendor or the customer, to a destination outside the territory of a Member State but within the territory of the Community, shall be regarded as a taxable person.

States, regional and local government authorities and other bodies governed by public law are not regarded as taxable persons in respect of the activities or transactions in which they engage as public authorities. This is so, even where they collect dues, fees, contributions or payments in connection with those activities or transactions. However, as an exception to the general rule, when State / regional / local government authorities engage in such activities or transactions, they shall be regarded as taxable persons in respect of those activities or transactions where their treatment as non-taxable persons would lead to significant distortions of competition. Annexure I appended to the EU VAT directive provides a list of activities (i.e. supply of water / electricity / gas, warehousing, organisation of public fares and trade exhibitions, etc.), in respect of which bodies governed by public law are regarded as taxable persons, provided that those activities are not carried out on such a small scale as to be negligible.

VAT rates:
The EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (for supplies of goods and services referred to in an exhaustive list). Actual rates applied for this purpose may vary between Member States and between certain types of products. There is a provision for super reduced rate also.

The most reliable source of information on current VAT rates for a specified product in a particular Member State is that country’s VAT authority. Nevertheless, it is possible to get an overview of the different rates applied from the VAT rates in the European Union information document.

Valuation:
For the purpose of levy of VAT on supply of goods or services, the taxable amount includes everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the said supply.

Inclusions:
The taxable amount shall include the following factors:

(a) taxes, duties, levies and charges, excluding the VAT itself;

(b) incidental expenses such as commission, packing, transport and insurance costs, charged by the supplier to the customer.

For the purposes of incidental expenses, Member States are allowed to regard expenses covered by a separate agreement as incidental expenses.

Exclusions:
The taxable amount shall not include the following factors:
(a) price reductions by way of discount for early payment;
(b) price discounts and rebates granted to the customer and obtained by him at the time of the supply;
(c) amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered in his books in a suspense account.

The taxable person must furnish proof of the actual amount of the expenditure in respect of reimbursements claimed and may not deduct any VAT which may have been charged.

Packing material:
As regards the costs of returnable packing material, Member States may take one of the followings:
(a) exclude them from the taxable amount and take the measures necessary to ensure that this amount is adjusted if the packing material is not returned;
(b) include them in the taxable amount and take the measures necessary to ensure that this amount is adjusted if the packing material is in fact returned.

EXEMPTIONS:
Member States grant exemptions in respect of certain activities in the interest of public at large. A snapshot of activities which are currently exempted from EU VAT is given below:

Supply by the public postal services, of services and the supply of goods incidental thereto.

Hospital and medical care and closely related activities undertaken by bodies governed by public law.

Provision of medical care in the exercise of the medical and paramedical professions as defined by the Member State concerned.

Supply of human organs, blood and milk.

Supply of services by dental technicians in their professional capacity and the supply of dental prostheses by dentists and dental technicians.

Supply of services by independent groups of persons, who are carrying on an activity which is exempt from VAT or in relation to which they are not taxable persons, for the purpose of rendering their members the services directly necessary for the exercise of that activity, where those groups merely claim from their members exact reimbursement of their share of the joint expenses, provided that such exemption is not likely to cause distortion of competition

Supply of services and of goods closely linked to welfare and social security work, including those supplied by old people’s homes, by bodies governed by public law or by other bodies recognised by the Member State concerned as being devoted to social wellbeing.

Supply of services and of goods closely linked to the protection of children and young persons, by bodies governed by public law or by other organisations recognised by the Member State concerned as being devoted to social wellbeing.

Provision of children’s or young people’s education, school or university education, vocational training or retraining, including the supply of services and of goods closely related thereto, by bodies governed by public law having such as their aim or by other organisations recognised by the Member State concerned as having similar objects.

Tuition given privately by teachers covering school or university education.

Supply of staff by religious or philosophical institutions with a view to spiritual welfare.

Supply of services, and the supply of goods closely linked thereto, to their members in their common interest in return for a subscription fixed in accordance with their rules by non-profit-making organisations with aims of a political, trade union, religious, patriotic, philosophical, philanthropic or civic nature, provided that this exemption is not likely to cause distortion of competition.

Supply of certain services closely linked to sport or physical education by non-profit-making organisations to persons taking part in sport or physical education.

Supply of certain cultural services and the supply of goods closely linked thereto, by bodies governed by public law or by other cultural bodies recognised by the Member State concerned.

Supply of services and goods, by organisations whose activities are exempt in connection with fund-raising events organised exclusively for their own benefit, provided that exemption is not likely to cause distortion of competition.

Supply of transport services for sick or injured persons in vehicles specially designed for the purpose, by duly authorised bodies.

Activities, other than those of a commercial nature, carried out by public radio and television bodies.

Certain financial services / transactions such as insurance / reinsurance transactions and related broking services, granting and negotiation of credit, negotiating of or dealings in credit guarantees and management of credit guarantees, acceptance of deposit / current accounts, banking transactions: payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection, transactions in money, etc.

Invoicing:
Taxable persons doing business in the EU are subject to a single set of basic EU-wide invoicing rules1 , and in certain areas, national rules set by the individual EU country. Businesses are free to issue electronic invoices subject to acceptance by the recipient. National tax authorities cannot require businesses to provide any notification or to receive authorisation. However, e-invoicing will become obligatory in public procurement. Businesses can outsource invoicing operations to a third party or to the customer (i.e. self-billing), in some circumstances.

Businesses are generally free to store invoices where and how they like (paper/electronic, in a different EU country to where they are based, etc.).

An ‘invoice’ is required for VAT purposes, under EU rules, in case of business-to-business (B2B) supplies and certain business-to-consumer (B2C) transactions. In some cases, there are specific national rules on transactions which require businesses to issue an ‘invoice’.

Apart from the usual Information required in an Invoice such as date of invoice, serial number, customer’s VAT identification number, supplier’s and customer’s full name and address, description of quantity & type of goods supplied or type & extent of services rendered, VAT rate applied, VAT amount payable, breakup of VAT amount payable by VAT rate or exemption unit price of goods or services – exclusive of tax, discounts or rebates (unless included in the unit price), some extra information is also required in some cases. Specific instance of the same are as follows:

Exempt transactions – a reference to the appropriate (EU or national) legislation exempting it, or any other reference indicating it is exempt (at the choice of the supplier).

Customer liable for the tax (i.e. under the reversecharge procedure) – the words ‘Reverse charge’.

Intra-EU supply of a new means of transport – the details specified in Article 2(2)(b) of the VAT Directive (e.g. for a car, its age and mileage).

Applicability of margin scheme – a reference to the particular scheme involved (e.g. ‘Margin scheme — travel agents’).

Self-billing (customer issues invoice instead of supplier) – the words ‘Self-billing’.

Person liable for tax is a tax representative – their VAT identification number, full name and address.

Supplier is operating a cash-accounting system – the words ‘Cash accounting’.

Once an invoice includes all the required information (depending on the case, and the EU country), it serves as sufficient proof to allow a right to deduct VAT in whichever EU country the person is concerned. No EU country will prevent this by requiring any extra information, prior confirmation, etc.

EU filings:

Intrastat
Intrastat is a system for reporting intra-community transactions made by taxable persons. This system was first introduced on 1st January 1993 with a view to allow the collection of statistical information on intra-community trade in the absence of customs controls at the borders. EU businesses are required to submit information on a periodic basis to the VAT authorities if they make either intra-community supplies or acquisitions of goods in excess of specified limits.

Taxable persons making intra-community supplies are also required to submit EU Sales Lists (ESLs) to the VAT authorities on a quarterly basis. Failure to comply (delays, errors or omissions) can lead to penal consequences. Effective from 1st January 2010, a new requirement has been introduced whereby businesses are also obligated to file Intrastat returns for cross-border services provided to business customers in other EU Member States.

VAT returns:
Currently, all business registered for EU VAT purposes are obligated to file VAT returns as per their respective counties requirements i.e. National VAT returns. As a result, business intra- community supply / acquisition are required to file VAT returns in more than one jurisdiction (in different forms and with varying reporting requirements) and leads to an extra administrative burden on the business. A proposal has been moved by the European Commission (on 23rd October 2013) whereby all business within the EU will be required to file a standard VAT return. The standard VAT return, which will replace national VAT returns, will ensure that businesses are asked for the same basic information, within the same deadlines, across the EU.

The purpose of the standard VAT return is to reduce administrative burdens for businesses, ease of tax compliance and make tax compliances across the EU more efficient. The proposal also envisages a simplified and uniform set of information that businesses will have to provide to tax authorities when filing their VAT returns, regardless of the Member State of submission. The Commission envisages that once the proposed directive is adopted by the Council, after consultation with the European Parliament, it will enter into force on 1st January 2017.

Parting words:
Undoubtedly, the EU VAT legislation is unique in many ways when compared to the VAT legislations of other countries. Success of the EU VAT regime rests largely on the effectiveness of the European Commission and co-operation of the Member States. They are indeed a fine example to emulate (various countries, having diverse political and economic interest, coming together and administering the tax laws with such a smooth and satisfactory procedure).

Our country, which has borrowed several concepts from the EU VAT legislation while designing the ‘place of supply rules’ and the ‘point of taxation rules’, etc., can also take some inspiration from the Member States and their spirit of co-operation and trust while designing Indian Goods and Services Tax system.

Mangal Keshav Securities Limited vs. ACIT ITAT “B” Bench, Mumbai Before Joginder Singh (J. M.) and Ashwani Taneja (A. M.) ITA No.: 8047/Mum/2010 A.Y.:2006-07, Date of Order:29th September, 2015 Counsel for Assessee / Revenue: Nishan Thakkar & Prasant J. Thacker / J. K. Garg

fiogf49gjkf0d
Explanation to Section 37(1) – Fines, penalties paid for procedural non-compliances to regulatory authorities are compensatory in nature hence allowable as business expenditure.

Facts
The assessee is a closely held company engaged in the business of share/stock broking and is a member of BSE, NSE and is a DP for CDSL & NSDL and Mutual Fund Distribution.

During the course of assessment proceedings, it was noted by the AO from the Tax Audit Report that the assessee had paid penalty/fine levied by the Stock Exchange amounting to Rs.9.08 lakh. According to the assessee the fines, penalty etc. were paid for some procedural non-compliances, inadvertently done by the assessee and it had neither undertaken any activities which were in ‘violation’ or ‘offence’ of any law, nor has conducted any activities which were prohibited by law. But the AO was not satisfied and he disallowed the said amount by invoking Explanation to section 37. On appeal the CIT(A) confirmed the order of the AO.

Held
The Tribunal noted that the impugned amount was paid on account of minor procedural irregularities, in day- today working of the assessee. The assessee’s business involved substantial compliance requirements with various regulatory authorities e.g. BSE, NSE, CDSL, NSDL, & SEBI etc. According to it, in the regular course of the assessee’s business certain procedural non-compliances were not unusual, for which the assessee is required to pay some fines or penalties.

It further observed that these routine fines or penalties were “compensatory” in nature; these were not punitive. These fines were generally levied to ensure procedural compliances by the concerned authorities. Their levy depended upon the facts and circumstances of the case, and peculiarities or complexities of the situations involved. It further observed that under the income tax law, one is required to go into the real nature of the transactions and not to the nomenclature that may have been assigned by the parties. Further, relying upon the judgment of the Tribunal in assessee’s own case for A.Y. 2007-08 in ITA No.121/Mum/2010 dated 04.11.2010, the Tribunal allowed the appeal of the assessee.

Neela S. Karyakarte vs. ITO ITAT “B” Bench, Mumbai Before Joginder Singh (J. M.) and Ashwani Taneja (A. M.) ITA No.: 7548/Mum/2012 A.Y.: 2005-06, Date of Order:28th August, 2015 Counsel for Assessee / Revenue: Dr. K. Shivaram / Vijay Kumar Soni

fiogf49gjkf0d
Section 54EC: The period of six months available for making investment means six calendar months and not 180 days. Payment by cheque dates back to date of presentation & not date of encashment

Facts
The assessee sold a row house on 27.04.2004 for Rs.18,50,000/-. After indexation, the assessee earned long term capital gain of Rs.10,90,176/-. The assessee invested this capital gain in NHB Capital Gain Bonds 2006 on 31st December, 2004 and claimed exemption u/s 54EC. However, the AO found that the assessee was not eligible for exemption u/s 54EC, since the investment was not made by the assessee within six months from the date of transfer of original asset, as per requirement of section 54EC. The AO observed that the sale of row house was executed on 27.04.2004, as per the registered sale agreement, whereas the assessee has invested the amount in NHB Bonds on 31.12.2004. Thus, as per AO, it was beyond the period of six months as stipulated in section 54EC. Accordingly, it was held by the AO that benefit of deduction u/s. 54EC was not allowable to the assessee.

Being aggrieved, the assessee filed appeal before the CIT(A) who after considering all the submissions and evidences placed by the assessee held that going by the date of full and final settlement, the date of transfer would be 29th June, 2004. However, according to him, since the assessee made investment in the bonds on 31.12.2004, it fell beyond the period of six months from the date of transfer and therefore, the assessee was not eligible for deduction u/s. 54EC.

Held
The Tribunal noted that the CIT(A) has held that the date of transfer of the original asset was 29th June, 2004 and the same is not disputed by the revenue. The Tribunal further took note of the decisions of the Special Bench of Ahmedabad in the case of Alkaben B. Patel (2014) (148 ITD 31) and the Mumbai Bench of Income Tax Tribunal in the case of M/s. Crucible Trading Co. Pvt. Ltd. (ITA No. 5994/Mum/2013 dated 25.02.2015) where the term “6 months” have been interpreted to mean 6 calendar months and not 180 days. Further, it also took note of the decision of the Supreme Court in the case of Ogale Glass Works Ltd. (1954) 25 ITR 529, where it was held that the cheques not having been dishonoured but having been cashed, the payment relates back to the dates of the receipt of the cheques and as per the law the dates of payments would be the date of delivery of the cheques. As per the facts, the assessee had filed an application with National Housing Bank on 23.12.2004 along with the cheque of even date. Thus, it was held that the assessee had clearly made investment within the period of 180 days also. Thus, the Tribunal held that viewed from any angle it can be safely said that the assessee has made investment within the period of six months. In the result, the appeal of the assessee was allowed.

2016-TIOL-303-ITAT-KOL Apeejay Shipping Ltd. vs. ACIT ITA No. 761/Kol/2013 A.Y.: 2004-05, Date of Order: 20th January, 2016

fiogf49gjkf0d
Sections 153(2A), 153(3), 254 – If the Tribunal has set aside or cancelled the assessment, then the fresh order of assessment by the AO shall be passed within the period as prescribed u/s. 153(2A). The provisions of section 153(2A) are absolute and they impose a fetter on income-tax authorities to make a set-aside assessment after the expiry of periods mentioned in this sub-section. This is a statutory fetter which is not for the assessee to relax or waive or vice-versa. The power to make assessment lapses complete upon the expiry of the periods mentioned in the section.

Facts
The assessee company filed its return of income for assessment year 2004-05 on 29.10.2004. The original assessment u/s. 143(3) of the Act was completed by the AO on 15.12.2006 rejecting the claim of the assessee u/s 33AC of the Act on the ground that the assessee had not specified the amount transferred to reserve in the P & L Account for the relevant year.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the claim of the assessee vide his order dated 29.8.2007.

Aggrieved, the revenue preferred an appeal to the Tribunal. The Tribunal vide its order dated 25.7.2008 set aside the issue and restored the matter back to the file of the AO to decide the same afresh.

The AO while giving appeal effect, framed assessment u/s. 254/143(3) and also u/s. 263/143(3) vide order dated 8.12.2011 and disallowed the deduction u/s. 33AC of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it contended that the order dated 8.12.2011, passed by the AO, was beyond the period of limitation. The CIT(A) dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal noted that it had vide its order dated 25.7.2008 set aside the appeal and restored the matter back to the file of the AO to decide the matter afresh. It also noted that the order dated 8.12.2011 passed to give effect to the order of the Tribunal read as under:

“In pursuance of the Hon’ble ITAT, `A’ bench, Kolkata’s order in ITA No. 98/Kol/2008 dated 28.7.2008, a notice u/s. 142(1) was issued to the assessee on 16.11.2010, requiring clarification on the details of Reserves & Surplus as on 31.3.2004 …..”

The Tribunal noted the decision of the co-ordinate bench of the Tribunal in the case of McNally Bharat Engineering Co. Ltd. vs. DCIT in CO No. 12/Kol/2011, arising out of ITA No. 98/Kol/2011 for AY 2002-03 dated 9.10.2015 on identical proposition of law.

Following the ratio of the decision of the Kolkata Bench of the Tribunal in the case of McNally Bharat Engineering Co. Ltd. vs. DCIT (supra), the Tribunal held that no assessment is possible after the expiry of period of limitation, the provisions of section 153(2A) are absolute and they impose a fetter on income-tax authorities to make a set-aside assessment after the expiry of the periods mentioned in this sub-section. This is a statutory fetter which is not for the assessee to relax or waive or vice-versa. The power to make assessment lapses completely upon the expiry of the periods mentioned in the section. It observed that in the present case, the Tribunal had completely set aside the assessment on the abovementioned issue and directed the AO to reframe the assessment afresh. It held that the assessee’s case fell in 2nd proviso to section 153(2A) of the Act.

The Tribunal set aside the assessment and held that the assessment made after expiry of limitation in terms of section 153(2A) of the Act is invalid.

This ground of appeal filed by the assessee was allowed.

2016-TIOL-306-ITAT-MAD ACIT vs. Encore Coke Ltd. ITA No. 1921/Mds/2015 A. Y.:2010-11.Date of Order: 22nd January, 2016

fiogf49gjkf0d

Sections 28, 40(a)(ia) – Prior period expenses can be allowed as a deduction in the previous year in which tax is actually deducted and remitted to the Government.

Facts
The assessee company had incurred certain expenditure in earlier years but the actual payments were made to the parties in the financial year relevant to the assessment year under consideration after deducting and remitting necessary TDS. The assessee had, in its accounts, reflected this expenditure as prior period expenditure since it had not claimed this expenditure in the earlier years when it was incurred.

In the course of assessment proceedings, the Assessing Officer (AO) disallowed this expenditure on the ground that it was prior period expenditure.

Aggrieved, the assessee preferred an appeal to the CIT(A) who allowed the appeal filed by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
The Tribunal observed that in the present case though the expenditure related to earlier period, actually TDS was paid in the assessment year under consideration and therefore, in view of the second limb of section 40(a) (ia), since the tax was deducted and paid during the previous year relevant to the assessment year under consideration, the same is allowable in the assessment year under consideration.

The Tribunal noted that the same view has been taken by the Cochin Bench in ITA No. 410/Coch/2014 dated 12.12.2014 in the case of M/s. Thermo Penpol Ltd. vs. ACIT.

Following the decision of the Cochin Bench of the Tribunal as well as considering the provisions of the Act, the Tribunal dismissed the ground of appeal filed by the Revenue.
The appeal filed by the Revenue was dismissed.

TDS – Sections 194C and 194J

fiogf49gjkf0d
i) Supply of material under turn key project – Section 194C would not apply in respect of payment made against the supply of materials included in composite contracts for executing turn key projects
ii) Bill management services are not professional or technical services – It is a service contract – Section 194C will apply and not 194J

CIT vs. Executive Engineer, O&M Division(GESCOM); 282 CTR 138 (Karn):

The following two questions were raised by the Revenue in the appeal filed before the Karnataka High Court:

“i) Whether the provisions of section 194C would be attracted on the payments made against the supply of materials included in composite contracts for executing turn key projects?

ii) Whether bill management services are professional or technical services? Whether section 194J would apply or section 194C?”

The High Court held as under:

“i) In respect of payments made in respect of supply of materials included in composite contracts for executing turn key projects, provisions of section 194C would not apply.
ii) Services rendered by the agencies towards bill management services are not professional services and section 194J is not attracted. The contract was rightly held to be service contract by the Tribunal. Section 194C is attracted.”

Reassessment – Sections 147 & 148 – A.Y. 2002- 03 – Information received from ED – AO set out information received from ED – He failed to examine if that information provided the vital link to form the ‘reason to believe’ that income of the assessee has escaped the assessment for the A.Y. in question – Reopening of the assessment is not valid

fiogf49gjkf0d
CIT vs. Indo Arab Air Services: 283 CTR 92 (Del):

The assessment for the A. Y. 2002-03 was reopened on the basis of the information received from the enforcement directorate. The Tribunal held that the reopening is not valid.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The Assessing Officer set out the information received from the Enforcement Directorate but he failed to examine if the information provided the vital link to form the ‘reason to believe’ that the of the income of the assessee had escaped assessment for the assessment year in question.

ii) While the Assessing Officer had referred to the fact that the Enforcement Directorate gave the information regarding cash deposits being found in the books of the assessee, the Assessing Officer did not state that he examined the returns filed by the assessee for the said assessment year and detected that the said cash deposits were not reflected in the returns.

iii) Further, information concerning payments made to third parties, which were unable to be verified by the Enforcement Directorate, also required to be assessed by the Assessing Officer by examining the returns filed to discern whether the said transaction was duly disclosed by the assessee.
iv) Consequently, no error was committed by the Tribunal in the impugned orders in coming to the conclusion that the reopening of the assessment was bad in law.”

Presumptive tax – Section 44BB – A. Y. 2008- 09 – Assessee non-resident – Prospecting for or production of mineral oils – Service tax collected by the assessee is not includible in gross receipts for the purposes of computation of presumptive income

fiogf49gjkf0d
DIT vs. Mitchell Drilling International Pvt. Ltd.; 380 ITR 130 (Del):

Assessee is a non resident. For the A. Y. 2008-09, the income of the assessee was assessable u/s. 44BB. For computing the income the assessee did not include the service tax received by it. The Assessing Officer included the service tax. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) For the purpose of computing the presumptive income of the assessee for the purpose of section 44BB the service tax collected by the assessee on the amount paid to it for rendering services was not to be included in the gross receipts in terms of section 44BB(2) r.w.s. 44BB(1).

ii) The service tax is not an amount paid or payable, or received or deemed to be received by the assessee for the services rendered by it. The assessee only collected the service tax for passing it on to the Government.”

Manufacture – Exemption u/s. 10B – A. Ys. 2003- 04 and 2004-05 – Assembling of instruments and apparatus for measuring and detecting ionizing radiators amounts to manufacture – Assessee entitled to exemption u/s. 10B –

fiogf49gjkf0d
CIT vs. Saint Gobain Crystals and Detectors India P. Ltd.; 380 ITR 226 (Karn):

The assessee was in the business of assembling instruments and apparatus for measuring and detecting ionizing radiators. The assessee claimed deduction u/s. 10B. For the relevant years, the Assessing Officer disallowed the claim on the ground that the assessee had not manufactured or produced articles or things as required u/s. 10B(1). The Tribunal allowed the assessee’s claim and held that the process carried out by the assessee in getting the final product, showed that the assessee was engaged in manufacture or production of an article or thing.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“The finished product which was sold by the assessee, was different from the materials which were procured for making such a finished product. A series of processes were carried out and a new product emerged. The assessee was entitled to exemption u/s. 10B.”

Limitation – Amendment – Increased limitation period of 7 years u/s 201(3) as amended by Finance (No.2) Act, 2014 w.e.f.1.10.2014 shall not apply retrospectively to orders which had become timebarred under the old time-limit (2 years/6 years) set by the unamended section 201(3). Hence, no order u/s. 201(i) deeming deductor to be assessee in default can be passed if limitation had already expired as on 1-10-2014 –

fiogf49gjkf0d
Tata Teleservices vs. UOI; [2016] 66 taxmann.com 157 (Guj)

Pursuant to the amendment of section 201(3) by the Finance (No.2) Act, 2014 w.e.f.1.10.2014, extending the period of limitation to 7 years the Assessing Officer issued notices u/s. 201(1) for the A. Ys. 2007-08 and 2008-09. The notices were challenged by the assessee by filing writ petitions. The Gujarat High Court allowed the writ petitions, considered the retrospectivity and the applicability of the amendment of section 201(3) and held as under:

“i) Considering the law laid down by the Hon’ble Supreme Court, to the facts of the case on hand and more particularly considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable w.e.f. 1/10/2014 and even considering the fact that proceedings for F.Y. 2007-08 and 2008- 09 had become time barred and/or for the aforesaid financial years, limitation u/s. 201(3)(i) of the Act had already expired on 31/3/2011 and 31/3/2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee and considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) as was amended by Finance Act, 2012 with retrospective effect from 1/4/2010, it is to be held that section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(i) of the Act can be passed for which limitation had already expired prior to amended section 201(3) as amended by Finance Act No.2 of 2014.

ii) Under the circumstances, the impugned notices / summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.”

Depreciation – Additional depreciation – Section 32(1)(iia) – A. Ys. 2007-08 and 2008-09 – Plant and machinery set up after 1st October 2006 but before 31st March 2007 – Half of additional depreciation of 20% is allowable in A. Y. 2007-08 and the balance half allowable in A. Y. 2008-09

fiogf49gjkf0d
CIT vs. Rittal India Pvt Ltd.; 380 ITR 423 (Karn): 282 CTR 431 (Karn):

The assessee acquired and installed new plant and machinery in the F. Y. 2006-07 after 1st October 2006. The assessee therefore claimed additional depreciation of 10%, in the A. Y. 2007-08, being half of the 20% allowable u/s. 32(2)(iia) and the same was allowed. The balance half was claimed in the A. Y. 2008-09 which was disallowed by the Assessing Officer. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) The beneficial legislation should be given liberal interpretation so as to benefit the assessee. The intention of the legislature is absolutely clear that the assessee shall be allowed certain additional benefit, which was restricted by the proviso to half being granted in one assessment year, if certain condition was not fulfilled. But that would not restrain the assesee from claiming the balance of the benefit in the subsequent assessment year.
ii) The Tribunal had rightly held that the additional depreciation allowed u/s. 32(1)(iia) is a onetime benefit to encourage industrialisation and the provisions related to it have to be construed reasonably, liberally and purposively, to make the provision meaningful while granting the additional allowance. Appeal is accordingly dismissed.”

Huge penalties being levied by SEBI following A recent Supreme Court decision

fiogf49gjkf0d
Introduction
SEBI has recently passed several orders levying huge penalties, running into crores for defaults like non-filing of documents/information. What is interesting is that levy of such huge and flat penalties is said to be mandatory and inevitable following the mandate of the recent decision of the Supreme Court in the case of SEBI vs. Roofit Industries Ltd. SEBI’s view is that such levy is unavoidable, it is effectively being held, even where there are no aggravating factors.

Summary of decision of Supreme Court and its immediate impact
The Supreme Court was dealing with the provisions of section 15A(a) of the SEBI Act, 1992 which provides for “a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less”. The penalty of Rs. 1 lakh per day of such failure, the Court held, is absolute and non-discretionary. Thus, if there was a delay/failure of, say, 75 days, the penalty would be Rs. 75 lakh. However, if the delay was of more than 100 days, then the penalty would be Rs. 1 crore.

While the decision is on penalty u/s. 15A(a), in view of almost identical wording in other penalty provisions (except 15F(a) and 15HB of the SEBI Act), it will apply to those provisions too. Further, there are several similar provisions in the Securities Contracts (Regulation) Act, 1956 and the Depositories Act, 1996 to which the ratio of this decision will apply. To take an example of violation under another such provision, in case of insider trading, the penalty u/s 15G of the SEBI Act would be a flat Rs. 25 crore. If three times the profits from insider trading exceeds Rs. 25 crore, the penalty will be such higher figure.

Note, however, that these provisions in all the three statutes have been amended with effect from 8th September 2014. The amended provisions now provide for a relatively far smaller minimum penalty. However, for all such violations during the period 29th October 2002 to 7th September 2014, such flat and huge penalty would be imposable. Considering that such violations of non-filing of documents/information (e.g., non-filing of information relating to change in holdings under the Takeover/Insider Trading Regulations) have been routinely found in numerous cases, all such cases will face such large penalties.

Indeed, within a very short time after this decision, SEBI levied penalties as follows:-

1. Presha Metallurgical Ltd. and others (Rs. 8 crore)

2. Vipul Shah (Rs. 4 crore)

3. Sunciti Financial Services Private Limited (Rs. 2 crore)

4. Alok Electricals Private Limited and others (Rs. 1 crore)

Detailed Discussion on Decision
The essential facts before the Supreme Court in this matter were as follows (there were several cases of broadly the same category in appeal and the facts discussed here relate to one of them – Alkan Projects). SEBI had levied a penalty of Rs. 1 crore on one of such parties for nonsubmission of information sought by it. The information was required to investigate certain alleged manipulation, etc. in the shares of Roofit Industries Ltd. Alkan appealed to the Securities Appellate Tribunal (“SAT ”). SAT noted that while the violation was clearly established, Alkan was in a bad financial position. It was impossible to recover such a large penalty, and thus it did not serve any purpose. In the event of non recovery, SEBI could prosecute Alkan but that, as SAT noted, would take a long time, considering the already existing backlog of similar cases. SAT also noted that the provisions of section 15J provided for certain factors to be considered for levy of penalty. While “impecuniosity” of the party was not specifically listed as a factor, SAT nevertheless held that it should also be considered while deciding the amount of penalty. SAT accordingly reduced the penalty from Rs. 1 crore to Rs. 15,000.

SEBI appealed to the Supreme Court. The Supreme Court set aside the order of SAT . It held that section 15J listed three exhaustive factors for consideration of penalty. No other factor, including “impecuniosity”, can be considered, the Court held. The wording of section 15(A)(a) was also definite and prescribed a penalty of Rs. 1 lakh per day (albeit with an upper limit of Rs. 1 crore) which the Court held to be absolute. According to the Hon’ble Court, the “clear intention” for such high penalty “…is to impose harsher penalties for certain offences, and we find no reason to water them down”.

The Supreme Court also held that the amended penalty provision left no discretion with the adjudicating officer (AO) and thereby, even “the scope of section 15J was drastically reduced” for this purpose. The Supreme Court also dealt with section 15I and whether it allows for discretion to the AO in such matters. According to the Hon’ble Court, the amendments taking away such discretion “ought to have been reflected in the language of section 15I, but was clearly overlooked”. However, it also noted that, post amendment with effect from 8th August 2014, the discretion was reintroduced into the law.

Following this decision, SEBI has levied huge penalties in several cases. It is apparent, from the clear wording of such orders of penalty, that it will follow the same course in all other cases before it of violations during this long period of approximately 12 years while this provision was in force. Mitigating factors would not go to reduce the penalty. Further, aggravating factors would not go to increase the penalty. It appears that sections 15I and 15J are thus by and large rendered otiose, of course for these limited purposes. (Note:- Ironically, the Supreme Court, in view of the peculiar facts of the case, and also on account of its ruling on whether the failure was a continuing one, held that the penalty would be a lower amount, since the failure was committed before 29th October 2002).

Critique
With due respect, the decision of the Supreme Court needs reconsideration.

Section 15I does specifically provide for discretion to the Adjudicating Officer. It provides that if the Adjudicating Officer “..is satisfied that the person has failed to comply with the provisions of any of the sections specified in subsection (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections.” The Hon’ble Court has, however, taken a view that section 15I should also have been amended to remove the discretion for cases where such penalty is leviable but this was “clearly overlooked” by the law makers.

The Court has held that the factors listed in section 15J are exhaustive, in view of the word – “namely”. Thus, it has held that other mitigating factors cannot be considered. It is submitted that a better interpretation of the section is that it obligates the AO to consider these factors and thus is a qualitative provision. If these factors are absent penalty may be reduced/not levied. If one or more of such factors are present, then depending on the intensity of such factors, higher penalty may be levied. Further, it is also submitted, considering the discretion inbuilt in section 15I, there is no bar in considering other mitigating or aggravating factors present in circumstances of each case.

Indeed, considering the contradictory and even ambiguous provisions of sections 15I and 15J, the Court could have, it is submitted with due respect, taken a view that discretion still exists for the AO.

The Hon’ble Supreme Court should have also considered that these penalty provisions have actually been applied fairly consistently in the past by SEBI (and upheld by SAT ) by applying penalties in a discretionary manner.

The Hon’ble Court should have also considered the absurd consequences of such an interpretation. To take an example, a violation of insider trading resulting in a profit of Rs. 1000 would nonetheless result in a penalty of Rs. 25 crore.

The view of SAT that impecuniosity should also be considered as a factor is also not devoid of merit. A penalty of, say, Rs. 1 crore on a person known to be insolvent is, as SAT rightly pointed out, only on paper. I had pointed out earlier in this column that the huge/record penalty of Rs. 7,269 crore levied by SEBI on PACL suffers from this same anomaly and defect and is thus equally meaningless/ on paper only.

It is also seen that before 29th October 2002 and on and after 8th September 2014, no such large and mandatory penalty was imposable. Even after 2014, though a minimum penalty is imposable, such minimum amount is relatively far small. It is inconceivable, in my view, that law makers could have considered levy of such huge and flat penalty, particularly considering that the matters with which the provisions relate to are not serious. Where they are serious, fairly large amount of penalties has indeed been provided for. If at all, it is respectfully submitted, the Hon’ble Court should have read down these provisions, instead of effectively reading down section 15I and 15J. I may add that the Supreme Court in Swedish Match’s case ([2004] 54 SCL 549 (SC)) did consider, in passing though, with the issue whether a penalty of Rs. 25 crore for non-compliance of making an offer is inevitable. However, the views there were not as emphatic and direct as in Roofit’s case.

Even otherwise, SEBI has also taken, in my view, a flawed stand with regard to another Supreme Court’s decision, viz., SEBI vs. Shriram Mutual Fund (68 SCL 216 (SC). SEBI considers (wrongly, in my opinion) this decision as holding that penalty should mandatorily follow a violation and there is no discretion to SEBI in the matter. While SEBI has not levied sky high penalties, as it has done following Roofit’s case, one hopes that this stand too is modified and made consistent with what the Hon’ble Court really mandated in that case.

Be that as it may, SEBI seems to be on a roll and is almost gleefully levying huge penalties. To me, it seems inevitable that the matter will go back to the Supreme Court. It is hoped that the Hon’ble Court reconsiders its view and holds that discretion still remains in matter of levy of penalty.

2015 (40) STR 881 (Guj) Riva Packaging Solutions Pvt. Ltd. vs. Comm. of Service tax

fiogf49gjkf0d
Territorial jurisdiction of the High Court

Facts
In the present case, dispute/show cause notice (SCN) was issued in Dadra & Nagar Haveli and an order confirming demand was passed. The Appellant challenged the order by filing an appeal before CESTAT’s Ahmedabad bench. CESTAT confirmed the demand. Thereafter the appeal was preferred before the Gujarat High Court.

Held
The High Court, on noticing that the dispute/SCN related to Dadra & Nagar Haveli, held that the Gujarat High court has no territorial jurisdiction to hear and decide the matter though the impugned order was passed by CESTAT ’s Ahmedabad bench. Accordingly, the Appeal was dismissed.

2015 (40) STR 833 (Sikkim) Future Gaming & Hotel Services (Pvt) Ltd vs. UOI

fiogf49gjkf0d
An explanation cannot enlarge the scope of a provision

Facts
The Appellant, a lottery distributor purchased lottery tickets from the State Government and thereafter, sold them to stockists and resellers after adding profit margin. This Court in the Appellant’s own case under the earlier provisions of law had already held that the activity of promoting, marketing, organising or in any other manner assisting in organising games of chance including lottery, was an activity falling under the expression “betting and gambling” which is in the domain of the State Legislature and the Centre had no power to tax such an activity. Post the judgement, in the Finance Act 2015, an explanation had been inserted in the definition of service to enlarge the definition as to cover the activities of lottery distributors.

Held
The High Court observed that, the principal requirement of the definition of ‘service’ is that the activity should be carried out by one person for another and such activity should be for a consideration. Since the Appellant was acting in a principal to principal relationship with the State Government buying and selling the lottery tickets and was not rendering any service to the state, the activity could not fall in the definition of ‘service’ per se. It was further held that, if an activity is not covered in the definition of ‘service’, then the same cannot be made taxable by way of an insertion of explanation, as an explanation cannot enlarge the scope of a provision. Accordingly, explanation was declared to be ultra vires and struck down.

2015 (40) STR 1066 (Del.) Alar Infrastructures Pvt. Ltd. vs. CCE, Delhi-I

fiogf49gjkf0d

Limitation period of 1 year as provided u/s. 11B of Central Excise Act, 1944 would apply to refund claims of taxable services only.

Facts
Refund claim of the appellant was rejected as time-barred vide section 11B of Central Excise Act, 1944 without considering the appropriateness of taxability on services. Appellant claimed that it exported services and facts of the present case were identical to other three appeals heard jointly by CESTAT wherein refund was allowed.

Held
Having regard to pertinent judicial pronouncements, it was observed that only if refund claims pertain to taxable services, limitation period of 1 year would apply vide section 11B (supra). Accordingly, the matter was remanded back to decide the matter as per the terms provided by Delhi High Court in the present case.

Concept of “Gross Receipts” vis-à-vis MVA T Rules, 2005

fiogf49gjkf0d
Introduction
Under the Maharashtra Value Added Tax Act, 2002 (MVAT Act) and the Maharashtra Value Added Tax Rules, 2005 (MVAT Rules), the dealers are entitled to a set off. However, they are subject to conditions as may be prescribed in the Rules. For example, Rule 52 of MVAT Rules which prescribes eligibility to set off reads as under:

“52. Claim and grant of set-off in respect of purchases made during any period commencing on or after the appointed day.

(1) In assessing the amount of tax payable in respect of any period starting on or after the appointed day, by a registered dealer (hereinafter, in this rule, referred to as ‘the claimant dealer’) the Commissioner shall subject to the provisions of [rules 53,54,55 & 55B] in respect of the purchases of goods made by the claimant dealer on or after the appointed day, grant him a set-off of the aggregate of the following sums, that is to say,

(a) the sum collected separately from the claimant dealer by the other registered dealer by way of [tax] on the purchases made by the claimant dealer from the said registered dealer of goods being capital assets and [goods the purchases of which are debited to the profit and loss account or, as the case may be, the trading account],

(b) tax paid in respect of any entry made after the appointed day under the Maharashtra Tax on the Entry of Motor Vehicles into Local Areas Act, 1987, and

(c) the tax paid in respect of any entry made after the appointed day under the Maharashtra Tax on the Entry of Goods into Local Areas Act, 2003.

(d) the purchase tax paid by the claimant dealer under this Act.”

Thus, to find out actual availability of set off reference is required to be made to Rules like Rules 53 & 54. Rule 53 prescribes reduction in set off whereas Rule 54 is about a negative list.

Rule 53(6)(b)
One of the Rules prescribing reduction in set off is rule 53(6). Rule 53(6)(b) is applicable to dealers in general. The said rule is reproduced below for ready reference.

“53. Reduction in set-off. –

(6) If out of the gross receipts of a dealer in any year, receipts on account of sale are less than fifty % of the total receipts, –

(a) …

(b) in so far as the dealer is not a hotel or restaurant, the dealer shall be entitled to claim set-off only on those purchases effected in that year where the corresponding goods are sold or resold within six months of the date of purchase or are consigned within the said period, not by way of sale to another State, to oneself or one’s agent or purchases of packing materials used for packing of such goods sold, resold or consigned:

Provided that for the purposes of clause (b), the dealer who is a manufacturer of goods not being a dealer principally engaged in doing job work or labour work shall be entitled to claim set-off on his purchases of plant and machinery which are treated as capital assets and purchases of parts, components and accessories of the said capital assets, and on purchases of consumables, stores and packing materials in respect of a period of three years from the date of effect of the certificate of registration.

Explanation.- For the purposes of this sub-rule, “receipts” means the receipts pertaining to all activities including business activities carried out in the State but does not include the amount representing the value of the goods consigned not by way of sales to another State to oneself or one’s agent.” It can be seen that the rule provides for reduction or, in other words, restricted set off, when the receipts from sales are less than 50% of gross receipts. The Explanation under rule 53(6)(b) also provides meaning of gross receipts. There are disputes about meaning of gross receipts and how to compute it.

It can also be noted that if receipts from sales are less than 50% of gross receipts then set off is eligible only in respect of purchases which are sold within six months from the date of purchase. Therefore, the goods which are not sold like, consumed capital goods or goods which are not sold within six months are not eligible for set off.

Mutual Funds
Recently there was a controversy in relation to availability of set off to Mutual Funds. The Hon. M. S.T. Tribunal had an occasion to decide such an issue in case of UTI Mutual Fund (VAT SA 100 to 102 of 2014 dt.22.9.2015). The facts as narrated in the judgment are as under:

“The Appellant is a mutual fund registered with the Securities and Exchange Board of India (SEBI) and is regulated under the SEBI (Mutual Funds) Regulations, 1996. UTI Gold Exchange Traded Fund (UTI GETF) is one of the schemes of the Appellant and the same is also regulated by SEBI under the SEBI MF regulations.

3. As per the SEBI MF regulations, the balance sheet and revenue accounts of each scheme are required to be prepared separately and audited separately and no consolidated balance sheet of various schemes of a Mutual Fund is prepared. Thus, each scheme has a separate entity including separate receipts, funds, assets liabilities, etc.

4. As per the MVAT provisions, VAT is applicable on the turnover of sale of goods and the definition of goods specifically excludes securities. Therefore only UTI GETF is subject to VAT and not the other schemes of the Appellant as other schemes invested in securities and not in gold.

The Appellant obtained VAT registration simultaneously with the launch of UTI GETF and not earlier despite the other schemes of the Appellant dealer being in operation much before that. Thus the Appellant is assumed the role of dealer only on the launch of UTI GETF scheme and only this scheme should be considered and not any other scheme of the Appellant.”

From the above, it can be seen that the Mutual Fund has receipts from various schemes like relating to securities, gold etc.. Over all, the sales receipts are from the sale of gold whereas there are other receipts towards securities etc.. The main issue involved was whether the gross receipts should be computed considering receipts from all the schemes or only from gold scheme separately.

The argument was that under MVAT Act, only sale of goods can be considered as receipts and not other receipts which do not involve goods like shares, securities etc..

The Hon. Tribunal has dealt with the issue in the following words:
“The Learned representative of revenue has relied on the judgment of this Tribunal reported in the case of M/s. UTI Mutual Fund (present Appellant) vs. State of Maharashtra reported in 2013 (ST1) GJX 0626 STMAH wherein it is observed:-

“The set-off u/s. 48(1)(a)(ii) of MVAT Act is circumscribed with limitations. The limitations are (i) circumstances, (ii) conditions (iii) restrictions, as may be specified in the Rules. Rule 53 prescribe reduction in set-off in full or part, particularly Rule 53(6)(b) MVAT Rules prescribe restriction. Restriction is in the nature of duration of purchase and its sale. The restriction is where the receipts on account of sale are less than 50% of the total receipts, the setoff is permissible only on those purchases effected in that year where corresponding goods sold or resold within six months from the date of purchases. The “receipts” are explained in explanation. ”Receipts” means the receipts pertaining to all activities, including business activities carried out in the State.”

On the plain reading of section 48(1)(a)(ii) of MVAT Act r/w Rule 53(6)(b) and Explanation of MVAT Rules, it is clear that the receipts would include all activities of the dealer including business activities. Receipts which are concerning the activities not involving the sale of goods, are also included in “Total Receipts” in Rule 53(6) of MVAT Rules. The submission of Smt. N. R. Badheka does not have a legal base in law. Rule 53(6)(b) and explanation are within delegated powers conferred by section 48(1) of MVAT Act.”

26. The Learned Advocate Smt. Badheka has strongly contended that UTI GETF is dealing in equity and therefore only the receipts pertaining to the activity of UTI GETF ought to have been considered for grant of set off u/r. 53(6)(b) of MVAT rules. However, on going through the explanation attached to 53(6)(b), we find that the receipt means receipts pertaining to all activities including business activities carried out in the state and therefore in our considered opinion, the other activities of UTI Mutual Fund are also required to be taken into consideration while calculating the receipts for the purposes of set off as they are also business activities carried out in the State.

27. The basic rule of interpretation is laid down by the Hon’ble Apex Court in the case of Union of India and Others vs. Priyankan Sharan and Another (LIS/ SC/2008/1228) wherein it is observed:

“It is a well settled principle in law that the Court cannot read anything into a statutory provision which is plain and unambiguous. A statutes is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent”.

28. It is well settled that in the matter of grant of set off or exemption, the relevant provisions are required to be construed strictly. No liberal interpretation is permissible in such matters. On going through the explanation attached to Rule 53(6(b) of MVAT Rules, it clearly appears that receipts for the purpose of said rules means the receipts pertaining to all the activities including business activities of the dealer carried out in the State. The contention of Learned Advocate Smt. Badheka that only the activities of UTI GETF should be taken into consideration for the purposes of grant of set off u/r. 53(6)(b) is thus devoid of merit and cannot be accepted.”

Conclusion
Thus the interpretation lays down that the gross receipts should be computed considering receipts from all activities in Maharashtra. It will include receipts from sale of goods as well as non sale activities also. Further, Mutual fund is considered as one entity and cannot be considered scheme wise.

The ratio laid down above will also apply to other dealers. The dealers in Maharashtra are required to consider the above interpretation while computing the setoff.

Welcome GST – Part IV VAT (GST) in the European Union (‘EU’)

fiogf49gjkf0d
Introduction
Note: The earlier write ups, under this series, covered the GST legislation in one country (comprising of several States). In comparison, the EU is unique in the sense that it comprises of several countries which have their own laws and tax legislation, but these laws conform to a common charter i.e. the EU directives.

The EU is a politico-economic union of 28 Member States that are located primarily in Europe. Presently, the following countries are members of the EU: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden, and the United Kingdom.

The EU operates through a system of supranational institutions and intergovernmental-negotiated decisions by the Member States. The supranational institutions are: the European Parliament, the European Council, the Council of the European Union, the European Commission, the Court of Justice of the European Union, the European Central Bank, and the Court of Auditors.

For the purposes of achieving a ‘single market’, the EU has developed a standardised system of laws and policies that apply in all Member States ensuring free movement of people, goods, services, and capital across Member States. The EU Value Added Tax (‘EUVAT’) is one such legislation. This tax is levied on goods and services supplied within the EU. While the EU’s supranational institutions themselves do not collect the tax, EU Member States are each required to adopt a VAT legislation that complies with the EU VAT code (read below about co-ordinated administration of value added tax within the EU).

EU VAT Area
The EU VAT area is a territory consisting of territory of all Member States of the EU and certain other countries which follow the EU rules on VAT . The principle is also valid for some special taxes on products like alcohol and tobacco. Goods are only considered as imported or exported if they enter or leave the EU area.

Authority and scope of the tax

The EU VAT system is regulated by a series of European Union directives issued by the European Council, the most important of which is the Sixth VAT Directive [Council Directive1 2006/112/EC of 28t November 2006 on the common system of value added tax]. The primary aim of the EU VAT directive is to harmonise VAT (content and implementation) within the EU VAT area. Besides this, the directive also specifies that VAT rates must be within a certain range. Some other key objectives of this directive are:

  • harmonisation of content and layout of the VAT declaration
  • regulation of accounting, providing a common legal accounting framework
  • detailed description of invoices2 and receipts3, meaning that Member States
  • have a common invoice framework
  • regulation of accounts payable
  • regulation of accounts receivable
  • standard definition of national accountancy and administrative terms.

The directive is updated from time to time, to address various issues arising from the movement of men, capital, material and services within the Member States and it includes “the place of supply of services” rules which have been in force since 1st January 2010. More recently, the directive was amended to rationalise the place of supply of services in respect of electronic services.

Co-ordinated administration of value added tax within the EU
VAT collected at each stage in the supply chain is remitted to the tax authorities of the concerned Member State and forms part of that State’s revenue. A small proportion goes to the EU in the form of a levy (‘VAT -based own resources’). Previously, in spite of the customs union, the differing VAT rates and the separate VAT administration processes resulted in a high administrative and cost burden for crossborder trade. The EU has tried to resolve this by developing the co-ordinated administration of VAT within the EU VAT area.

Key initiatives under the co-ordinated administration include:

Cross-border VAT is declared in the same way as domestic VAT , and thus, facilitates the elimination of border controls between Member States, saving costs and reducing delays. It also simplifies administrative work for freight forwarders.

‘Mini One Stop Shop’ simplification scheme (read more below) is one of the measures adopted to achieve the ‘Single market’ objective.

The value added tax principle

Output VAT: VAT on output supplies charged by a business and paid by its customers.
Input VAT: VAT that is paid by a business to other businesses on the supplies that a business receives
Input tax credit: A business is generally able to recover input VAT to the extent that the input VAT is attributable to its taxable outputs.

Input VAT is recovered by offsetting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment (refund) from the government. The net effect of this is that each supplier in the chain remits tax on the value added, and ultimately the tax is paid by the end consumer. The final consumer does not receive a credit for the VAT paid.

Destination based tax
Generally, VAT is charged on the ‘destination principle’ i.e. the supply of goods or services is taxed in the Member State where the goods or services are delivered commonly known as the ‘Member State of arrival’.

The mechanism for achieving this result is as follows:
The exporting Member State zero-rates the VAT. This means that the Member State of the exporting merchant does not collect VAT on the sale, but still gives the exporting merchant a credit for the VAT paid on the purchase by the exporter (in practice, this often means a cash refund).

The importing Member State ‘reverse charges’ the VAT . This means that the importer is required to pay VAT to the importing Member State at its rate. In many cases, a credit is immediately given for this as input VAT . The importer then charges VAT on resale in the normal way.

Exceptions are made to the destination based principle and are also made in case of:

supplies of goods such as: distance supply (i.e. mail order catalog sales or e-commerce supplies), supplies within EU to exempt/non-taxable legal persons and excise products (i.e. energy products, alcohol and alcoholic beverages and manufactured tobacco).

supplies of services such as: supply of transport, supply of real estate services, etc.

In such cases the tax is sometimes based on the ‘origin principle’ and collected in the State of origin, commonly known as ‘Member State of dispatch’. Supply of goods

Domestic supply
A domestic supply of goods is a taxable transaction where goods are received in exchange for consideration within one Member State. Thus, one Member State charges VAT on the goods and allows a corresponding credit upon subsequent resale of those goods.

Intra-Community acquisition
An intra-community acquisition of goods for a consideration is a taxable transaction on crossing two or more Member States. The place of supply is determined to be the destination Member State, and VAT is normally charged at the rate applicable in the destination Member State. However, there are special provisions for distance selling.

Distance sales

Distance sales treatment allows the vendor to apply domestic place of supply rules (ie., rules in the Member State of dispatch) for determining which Member State collects the VAT . This means that VAT is charged at the rate applicable in the Member State of dispatch. However, there are exceptions to this, for instance:

  • When a vendor in one Member State sells goods directly to individuals and VAT-exempt organisations in another Member State and the aggregate value of goods sold to consumers in that Member State is below the specified threshold4 in any 12 consecutive months, then such a sale of goods may qualify for a distance sales treatment.
  • supply of excisable goods to the UK (like tobacco and alcohol).

In the abovementioned cases of distance supply, where the supply of goods is made to final consumers in a Member State of arrival, the exporting vendor may be required to charge VAT at the rate applicable in the Member State of arrival. If a supplier provides a distant sales service to several EU Member States, a separate accounting of sold goods in regard to VAT calculation is required. The supplier then must seek a VAT registration (and charge applicable rate) in each such country where the volume of sales in any 12 consecutive months exceeds the local threshold.

Supply of services
A supply of services is the supply of anything that is not a goods. The general rule for determining the place of supply is the place where the supplier of the services is established (registered/incorporated), such as a fixed establishment where the service is supplied, the supplier’s permanent address, or where the supplier usually resides. VAT is then charged at the rate applicable in the Member State where the place of supply of the services is located and is collected by that Member State. This general rule for the place of supply of services (the place where the supplier is established) is subject to several exceptions. Most of the exceptions switch the place of supply to the place where the services are received. Such exceptions include the:

  • supply of transport services,
  • supply of cultural services,
  • supply of artistic services,
  • supply of sporting services,
  • supply of scientific services,
  • supply of educational services,
  • supply of ancillary transport services,
  • supply of services related to transfer pricing services,
  • and many miscellaneous services including
  • supply of legal services,
  • supply of banking and financial services,
  • supply of telecommunications,
  • supply of broadcasting,
  • electronically supplied services,
  • supply of services from engineers and accountants,
  • supply of advertising services, and
  • supply of intellectual property services.

The place of supply of services related to real estate is where the real estate is located. There are special rules for determining the place of supply of services delivered electronically. The mechanism for collecting VAT when the place of supply is not in the same Member State as the supplier is similar to that used for Intra-Community Acquisitions of goods, i.e. zero-rating by the supplier and reverse charge by the recipient of the services (if a taxable person). But if the recipient of the services is not a taxable person (i.e. a final consumer), the supplier must generally charge VAT at the rate applicable in its own Member State. If the place of supply is outside the EU, no VAT is charged.

(*It may be relevant to mention here that the current Place of Provision of Service Rules, 2012 which are effective from 1st July 2012 are based on the above rules)

Threshold and Registration
The threshold limits for registration are generally fixed by the Member State. The Sixth directive on EU VAT provides the threshold limit only in case of specific supplies such as distance supply, etc.

Businesses may be required to register for VAT in EU Member States, other than the one in which they are based if they supply goods via mail order to those states over a certain threshold. Businesses that are established in one Member State but receive supplies in another Member State may be able to reclaim VAT charged in the second State if they have a value added tax identification number. A similar directive, the Thirteenth VAT Directive, also allows businesses established outside the EU to recover VAT in certain circumstances.

REGISTERING FOR VA T USING MINI ONE STOP SHOP (MOSS)
To comply with the place of supply rules, businesses need to decide whether or not they want to register to use the EU VAT Mini One Stop Shop (MOSS) simplification scheme. Registration for MOSS is voluntary. If suppliers decide against the MOSS, registration will be required in each Member State where B2C supplies of e-services are made. With no minimum turnover threshold for the new EU VAT rules, VAT registration will be required regardless of the value of e-service supply in each Member State. EU MOSS registrations opened on 1st October 2014. (To be continued in the next issue of BCAJ)

Hiralal Chunilal Jain vs. Income tax Officer ITAT Mumbai “H” bench ITA No. 4547, 2545 & 1275/Mum/2014 A. Ys. 2009-10 & 2010-11. Date of Order: 01.01.2016

fiogf49gjkf0d
Section 69C – Addition made only on the basis of bogus parties identified by the Sales tax department deleted.

Facts
The assessee, an individual, runs a proprietary business of trading in ferrous and non-ferrous metals. During the assessment proceedings, the AO found that the assessee had purchased goods worth Rs.7.21 lakh from Shiv Sagar Steel whose name was appearing in the list of bogus parties forwarded by the sales tax authorities and the name of the assessee was appearing as a beneficiary in the list. The AO directed the assessee to produce the party. However, the supplier was not produced by the assessee. Summons issued to the party could not be served on the given address. The AO held the purchase transaction as bogus and treated the entire purchase of Rs.7.21 lakh as unexplained expenditure u/s.69C.

Aggrieved by the order of the AO, the assessee appealed before the CIT(A) and submitted that the AO had relied upon the information supplied by the investigation wing of the Sales Tax Department (STD) but he had not supplied the copy of the statement of the party recorded by the STD. Further, the assessee was also not allowed to cross examine the party. According to the assessee, he had discharged his obligation by submitting details of purchases, sales and bank transactions. He had also produced stock register before the AO. There was no evidence that payments for the so called bogus purchases had come back to the assessee. All purchases and sales were recorded in the books of accounts, quantitative details were also maintained and the AO had also accepted the sales.

The CIT(A) noted that the STD had treated the suppliers of goods as suspicious dealer since during the investigation, the supplier had admitted that they had issued accommodation bills. Further, he also noted that the assessee was not able to produce the party. According to the CIT(A),it was quite possible that the assessee purchased the goods from the grey market and took accommodation bills from the said party. Therefore, he held that an addition of 20% of the purchase would be justified in order to fulfil the gap difference of Gross Profit (GP) for the alleged purchase as well to plug any leakage of revenue.

Before the Tribunal, in addition to what was submitted before the CIT(A), the assessee pointed out that the CIT(A) had ignored the vital fact that the Net Profit ratio was 1.7% and the GP ratio was about 7%. He also relied upon the decisions of the Mumbai Tribunal in the cases of Deputy Commissioner of Income Tax vs. Rajeev G. Kalathil (67 SOT 52) and Asstt. Commissioner of Income Tax vs. Tristar Jewellery Exports Private Limited (ITA 8292/Mum/2011 dated 31.07.2015) and the Bombay High Court in the case of CIT vs. Nikunj Eximp Enterprises Pvt. Ltd. (372 ITR 619).

Held
The Tribunal noted that the AO had not rejected the sales made by the assessee and had made the addition only on the basis of the information received from the STD. The assessee was also maintaining the quantitative details and stock register. According to the Tribunal, the AO should have made an independent inquiry. He also did not follow the principles of natural justice before making the addition. It also noted that the CIT(A) had reduced the addition to 20%, but he had not given any justification, except stating that the same was done to plug the probable leakage of revenue. Considering the peculiar facts and circumstances of the case, the Tribunal reversed the order of the CIT(A) and allowed the appeal of the assessee.

C.R. Developments Pvt. Ltd. vs. JCIT ITAT `C’ Bench, Mumbai Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 4277/Mum/2012 A. Y.: 2009-10. Dateof Order: 13th May, 2015. Counsel for assessee / revenue : S. M. Bandi / Asghar Zain

fiogf49gjkf0d
Sections 22, 28 – Notional income in respect of three unsold shops cannot be charged to tax under the head `Income from House Property’.

Facts
The assessee company, engaged in the business of construction and development, held 3 unsold shops as stock-in-trade. In the return of income, the assessee had not offered any notional income in respect of these shops on the ground that three shops held at the end of the year were its trading assets and therefore their annual value is not chargeable under the head `income from house property’ as profit on sale thereof shall be chargeable to tax under the head of income from business. The AO did not agree with the assessee’s contention and brought the notional rental income in assessee’s hands u/s.23.

Aggrieved, the assessee preferred an appeal to CIT(A) who restored the matter back to the file of the AO with the direction to make an enquiry as to what would be the possible rent that the property might fetch.

Aggrieved, the assessee preferred an appeal to the Tribunal where, on behalf of the assessee reliance was placed on the decision of the Mumbai Bench of ITAT in the case of M/s Perfect Scale Company Pvt. Ltd., [ITA Nos.3228 to 3234/Mum/2013, order dated 6-9-2013], wherein it was held that in respect of assets held as business, income from the same is not assessable u/s.23(1) of the Act whereas on behalf of the Revenue, reliance was placed on the order of Hon’ble Delhi High Court in the case of Ansal Housing Finance & Leasing Co. Ltd., 354 ITR 180 (Delhi) in support of the proposition that even in respect of unsold flats by the developer is liable to be taxed as income from house property.

Held
The Tribunal noted that the Hon’ble Supreme Court in the case of M/s Chennai Properties & Investments Ltd. vs. CIT, reported in (2015) 56 taxmann.com 456 (SC), vide judgment dated 9-4-2015 has held that the action of the AO in charging rental income received by an assessee engaged in the activity of letting out properties under the head Income from House Property was not justified. The Hon’ble Supreme Court held that since the assessee company’s main object, is to acquire and held properties and to let out these properties, the income earned by letting out these properties is main objective of the company, therefore, rent received from the letting out of the properties is assessable as income from business.

On the very same analogy in the instant case, the assessee is engaged in business of construction and development, which is main object of the assessee company. The three flats which could not be sold at the end of the year were shown as stock-in-trade. Estimating rental income by the AO for these three flats as income from house property was not justified insofar as these flats were neither given on rent nor the assessee has intention to earn rent by letting out the flats. The flats not sold were its stock-intrade and income arising on its sale is liable to be taxed as business income. The Tribunal held that it did not find any justification in the order of AO for estimating rental income from these vacant flats u/s.23 which is assessee’s stock in trade as at the end of the year. Accordingly, the Tribunal directed the AO to delete the addition made by estimating letting value of the flats u/s.23 of the Act.

[2015] 173 TTJ 507 (Mum) Hasmukh N. Gala vs. ITO A. Y.: 2010-11. Date of Order: 19.8.2015

fiogf49gjkf0d
Section 54 – Conditions of section 54 stand complied when the assessee pays booking advance to a builder and the builder issues him a letter of allotment specifying the flat number and the specific details of the property. Deduction u/s. 54 cannot be denied on the ground that the new property was still under construction or that the legal title in the new residential house has not passed to the assessee within the specified period.

Facts
The assessee, an individual, was carrying on business of trading in glass. During the previous year relevant to the assessment year under consideration, the assessee had vide sale agreement dated 8th December, 2009 sold a residential house for a consideration of Rs. 1,02,55,000. Long term capital gain computed on sale of this residential house, amounting to Rs. 88,37,096, was claimed to be exempt u/s. 54 of the Act on the ground that the assessee had on 6th February, 2010 issued a cheque of Rs. 1 crore to a builder for purchase of Flat Nos. 1 and 2 in a building known as Ramniwas at Malad(E). The assessee produced a copy of receipt of payment made by him and also an allotment letter dated 15th October, 2010 from the builder.

In the course of assessment proceedings, the Assessing Officer (AO) noticed that the construction of the new house was not completed even after two years from the date of transfer of old house. He held that giving of an advance could not be treated as a `purchase’ for the purposes of section 54 of the Act. The AO, denied the claim made u/s. 54 of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO on the ground that the assessee, though, has parted with money but has not acquired possession or domain over the new residential house.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that the legal title has not passed or transferred to the assessee within the specified period and that the new property was still under construction. However, it also noted that the allotment letter by the builder does mention the flat number and has other specific details of the property. It noted the observations of the Delhi High Court in the case of CIT vs. Kuldeep Singh (2014) 270 CTR 561 (Del.) where the Delhi High Court having noted the ratio of the decision of the Supreme Court in the case of Sanjeev Lal vs. CIT (2014) 269 CTR 1 (SC) and also having referred to the decisions of the Madhya Pradesh High Court in the case of Smt. Shashi Varma vs. CIT (1999) 152 CTR 227 (MP) and of the Calcutta High Court in the case of CIT vs. Smt. Bharati C. Kothari (2000) 244 ITR 106 (MP) opined that when substantial investment was made in the new property, it should be deemed that sufficient steps had been taken and it would satisfy the requirements of section 54 of the Act.

It observed that the parity of reasoning explained by the Delhi High Court squarely applied to the case being decided. It also noted that the co-ordinate Bench in the case of Shri Khemchand Fagwani vs. ITO (ITA No. 7876/Mum/2010, order dated 10th September, 2014), has allowed the claim of exemption under similar circumstances.

Following the precedents, the Tribunal allowed the claim made u/s. 54 of the Act.

The appeal filed by the assessee was allowed.

2016-TIOL-54-ITAT-AHM Ishwarcharan Builders Pvt. Ltd. vs. DCIT – CPC TDS, Ghaziabad A. Ys.: 2013-14 and 2014-15. Date of Order: 23.12.2015

fiogf49gjkf0d
Sections 200A and 234E – Adjustment in respect of levy of fees u/s. 234E is beyond the scope of permissible adjustments contemplated u/s. 200A. In the absence of enabling provision, such levy could not be effected in the course of intimation u/s. 200A.

Facts
The assessee company received intimations issued u/s. 200A wherein while processing TDS statements, fee u/s. 234E was levied for assessment years 2013-14 and 2014-15.

Aggrieved by the levy of fees u/s. 234E in an intimation issued u/s. 200A, the assessee preferred an appeal to the CIT(A) who upheld the levy.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that the issue in all the appeals was squarely covered in favor of the assessee by the decision of ITAT Amritsar Bench in the case of Sibia Healthcare Private Ltd. vs. DCIT 2015-TIOL-798-ITATAMRITSAR vide order dated 9th June, 2015, wherein the Division bench interalia observed that post 1st June, 2015, in the course of processing of TDS statement and issuance of intimation u/s. 200A in respect thereof, an adjustment could also be made in respect of “fee, if any, shall be computed in accordance with the provisions of section 234E.”

The Tribunal further held that as the law stood, prior to 1st June, 2015, there was no enabling provision for raising a demand in respect of levy of fees u/s 234E. It held that section 200A, at the relevant point of time, permitted computation of amount recoverable from, or payable to, the tax deductor after making adjustment on account of “arithmetical errors” and “incorrect claims apparent from any information in the statement, after making adjustment for `interest, if any, computed on the basis of sums deductible as computed in the statement. No other adjustments in the amount refundable to, or recoverable from, the tax deductor, were permissible in accordance with the law as it existed at that point of time.

The Tribunal deleted the levy of late filing fees u/s. 234E, in all the eleven appeals, by way of impugned intimations issued.

The appeals filed by the assessee were allowed.

[2015] 155 ITD 167/61 (Chandigarh) Harpreet Singh vs. ITO A.Y. 2010-11. Date of Order – 31st July, 2015

fiogf49gjkf0d
Section 271(1)(c), read with section 22, of the Income-tax Act, 1961- No penalty can be imposed in a case where assesse suo motu revises his return declaring additional income and has paid taxes thereon before any detection of concealment by revenue authorities.

FACTS
The assessee filed his return declaring certain rental income. Subsequently, the assessee suo moto revised its return wherein he included certain additional amount of rental income.

Since original return was not filed u/s. 139(1) within prescribed time, the Assessing Officer opined that return filed subsequently could not be treated as revised return. The Assessing officer thus completed assessment u/s. 143(3). He also passed a penalty order u/s. 271(1)(c) for concealment of particulars relating to rental income.

The Commissioner (Appeals) confirmed penalty order.

On second appeal:

HELD
The Tribunal observed that in the instant case the assessee had offered additional rental income and paid the taxes thereon before any detection of concealment by the revenue authorities. No notice or query was raised regarding the rental income offered by the assessee for taxation. Therefore, it cannot be said that the assessee either concealed the income or furnished the inaccurate particulars of income. In this case, the rental income inadvertently omitted in the original return was voluntarily offered for taxation during the course of assessment proceedings. The assessee submitted that during the course of assessment proceedings, the assessee realized its mistake and pointed out the same to the Assessing Officer.

There was no detection of concealed income by the revenue authorities. The assessee voluntarily offered the rental income for taxation and the same was accepted by the Assessing Officer in the assessment order passed u/s. 143(3) of the Act. Considering the entire facts and circumstances of the present case, it was held that no penalty u/s. 271(1)(c) can be validly levied. Therefore, the penalty levied by the Assessing Officer and confirmed by the Commissioner (Appeals) is cancelled.

[2015] 155 ITD 140/61 taxmann.com 178 (Chandigarh) DCIT vs. Gulshan Verma A.Y. 2005-06. Date of Order : 14th July, 2015

fiogf49gjkf0d
Section 68 – Where assessee received certain unsecured loan from a non resident, in view of fact that the said amount was advanced through an account payee cheque from NRE account of lender, no addition can be made u/s. 68 in respect of the said loan.

FACTS
The asseessee had taken an unsecured loan from one party ‘S’ residing in USA. The amount was obtained from an NRE account maintained by the lender with ‘C’ bank.

According to the Assessing Officer, the assessee failed to submit any evidence, viz. a copy of bank account of the lender in the country of his residence from where the funds were transferred to his NRE account maintained with ‘C’ bank. The Assessee also failed to submit any evidence regarding the remittance into the NRE account.

In the absence of the above-mentioned documents, the Assessing Officer held that the creditworthiness of the lender was not established and added the loan amount to the total income of the assessee u/s. 68.

The Commissioner (Appeals) confirmed the above treatment.

On Second appeal:

HELD
The Tribunal observed that in order to discharge the onus u/s. 68, the assessee must prove the following ingredients:-

1. The identity of the creditor
2. The capacity of the creditor to advance the money.
3. The genuineness of the transaction

There was no dispute regarding the identity of the creditor. The assessee had submitted a certificate from the manager of ‘C’ bank stating that ‘S’ holder of NRE account had transferred Rs. 4,25,000/- through a cheque on the account of the assessee.

The assessee had also produced the bank statement of ‘C’ bank before the authorities to demonstrate that ‘S’ had transferred the said amount to him. The assessee had also produced confirmation letter in the form of an affidavit of ‘S’ duly attested by ‘T’, Notary Public State of Meryland wherein ‘S’ had stated that he is a resident of USA. He had also confirmed giving of interest free unsecured loan from ‘C’ bank by way of cheque. The lower authorities were not in question about the authenticity of the affidavit. The only doubt was that the lender had not disclosed his source of income. The lower authorities also verified the passport of the lender.

There is no dispute that ‘S’ was maintaining an NRE account which was opened with an initial deposit of $10,000, i.e., Rs. 4,48,829/-. The ‘C’ bank had issued a certificate to this effect. The Assessing Officer raised an objection that the assessee failed to file a copy of the bank account of the lender in the country of his residence. The assessee had also submitted a copy of ITR filed in USA by ‘S’ for the period 01.01.04 to 31.12.04, wherein the annual income of $22,201 had been declared. There is no dispute about the financial capacity of the lender as well.

Considering the entire facts and circumstances of the case and the income which the lender had reported in ITR, there was no reason to doubt the creditworthiness or the financial capacity of the lender and thus there can be no addition u/s. 68.

Therefore, the impugned addition was deleted.

Search and seizure – Retention of seized articles – Section 132A – A. Y. 2012-13 – IT authorities requisitioning silver articles of assessee from railway police for purpose of investigation – Assessment order taking note of such seizure but no addition on account of seized articles – IT authorities to hand over seized articles to assessee

fiogf49gjkf0d
K. S. Jewellers Pvt. Ltd. vs. DIT; 379 ITR 526 (Guj):

The railway police seized silver ornaments from the authorised person of the assessee and registered a case u/s. 124 of the Bombay Police Act. The Railway police informed the Income-tax Department about seizure of the silver ornaments pursuant to which the Income-tax Department requisitioned the ornaments for the purpose of investigation under the provisions of the Income-tax Act, 1961. Assessment order took note of the seizure but no addition was made on that count. Assessee’s applications for release of the articles were ignored.

The Gujarat High Court allowed the writ petition and held as under:

“i) The silver ornaments weighing 219.841 kgs. were requisitioned by the Income-tax Authorities in exercise of the powers of section 132A in the F. Y. 2011- 12. Thereafter the assessment was framed by the Assessing Officer of the assessee for the A. Y. 2012-13, whereby after taking note of such requisition made by the authorities, the return as filed by the assessee was accepted without making any addition on account of such seizure.

ii) Under the circumstances, without entering into the merits of the validity of the authorisation issued u/s. 132A and in view of the assessment order made in the case of the assessee, the Income-tax Authorities could no longer continue with the seizure of the ornaments and the seized ornaments were required to be returned to the assessee.

iii) The respondent authorities are directed to forthwith hand over the seized silver ornaments to the petitioner within a period of four weeks from today.”

Penalty – Concealment – Section 271(1)(c) – A. Y. 2008-09 – Capital gains – Exemption – Whether assesee entitled to exemption u/s. 54 or section 54F or neither pending before High Court – Addition itself debatable – Penalty u/s. 271(1)(c) not justified

fiogf49gjkf0d
CIT vs. Dr. Harsha N. Biliangudy; 379 ITR 529 (Karn):

For the A. Y. 2008-09, the assessee’s claim for deduction u/s. 54/54F was pending before High Court for consideration. The Tribunal deleted the penalty imposed by the Assessing Officer u/s. 271(1)(c).

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) The imposition of penalty u/s. 271(1)(c) was for concealment of material particulars of income by the assessee or furnishing inaccurate particulars of such income. It was not the case of the Revenue that the assessee had furnished details with regard to the income derived from the sale and purchase of the properties. The question as to whether the assessee was to be given the benefit u/s. 54 or section 54F or was not to be given the benefit, was yet to be finalized by the High Court, where the appeal against the assessment proceedings was still pending.

ii) The assessee had given full description of the property which was sold by him and of the property purchased by him. Merely because the assessee was not to be given the benefit u/s. 54 as the property sold by the assessee was not a residential property it could not be said that there was concealment of material information by the assessee because complete details of the property sold by the assessee were given by him in the returns filed by him.

iii) Where penalty was imposed in respect of any addition where the High Court has admitted the appeal on substantial question of law, then the sustainability of the addition itself becomes debatable, and in such circumstances penalty could not be levied u/s. 271(1)(c).”

Exemption u/s. 10A – A. Y. 2000-01 – Relevance of date of notification of STPI – Assessee having been notified by STPI on 04/03/2000 is eligible for exemption u/s. 10A for entire A. Y. 2000-01 – AO was not justified in restricting the benefit for the period after 04/03/2000

fiogf49gjkf0d

CIT vs. Soffia Software Ltd.; 281 CTR 594 (Mad):

The assessee was notified by the STPI on 04/03/2000 as eligible for exemption u/s. 10A of the Income-tax Act, 1961. For the A. Y. 2000-01, the assessee claimed exemption u/s. 10A of the Act. The Assessing Officer restricted the exemption to the period after 04/03/2000/-. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) The CIT(A) as well as the assessing authority fell into error by holding that registration as an STPI is a requirement for the assessee to claim the benefit u/s. 10A. Section 10A applies if an industrial undertaking has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year.

 ii) In this case, the date of STPI notification is 04/03/2000. Therefore the assessee has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year in the STPI unit and it will be entitled to deduction u/s. 10A in respect of profit attributed to export turnover. The Circular issued u/s. 10B cannot be made applicable to a case falling u/s. 10A.

iii) Furthermore, the circular which has been relied upon by the CIT(A) dated 06/01/2005, has no relevance to the A. Y. 2000-01. The assessee is eligible for exemption u/s. 10A for the entire A. Y. 2000-01.”

Business expenditure – Disallowance u/s. 40(a)(ia) – A. Y. 2008-09 – Reimbursment of service charges is not taxable – Tax not deductible at source from such amount – Expenditure cannot be disallowed u/s 40(a)(ia) of the Act

fiogf49gjkf0d

CIT vs. DLF Commercial Project Corporation; 379 ITR 538 (Del):

For the A. Y. 2008-09, the Assessing Officer made an addition of Rs. 19,09,83,236/- u/s. 40(a)(ia), for non deduction of tax at source on reimbursement of expenditure paid to DLF though the latter entity had deducted tax at source on the payments made by it as a facilitator on behalf of the assessee. The Tribunal deleted the addition.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“It is undisputed that DLF deducted tax at source on payments made by it under various heads on behalf of the assessee. Further, it is also not disputed that the assessee deducted TDS on the service charges paid by it to DLF on reimbursement expenses. In such circumstances this Court holds that the entire amount paid by the assessee to DLF is entitled to deduction as expenditure.”

Business expenditure – Disallowance u/s. 14A – Variable ‘A’ prescribed in the formula in Rule 8D(2)(ii) (to make disallowance in case of common interest expenditure) would exclude both interest attributable to tax exempt income as well as taxable income

fiogf49gjkf0d
Principal CIT vs. Bharti Overseas (P.) Ltd.; [2015] 64 taxmann.com 340 (Delhi):

Considering the scope of Rule 8D(2)(ii) for computing disallowance u/s. 14A of the Income-tax Act, 1961, the Delhi High Court held as under:

“i) The object behind section 14A (1) is to disallow only such expense which is relatable to tax exempt income and not expenditure in relation to any taxable income. This object behind section 14A has to be kept in view while examining Rule 8D (2) (ii). In any event a rule can neither go beyond or restrict the scope of the statutory provision to which it relates.

ii) Rule 8D (2) states that the expenditure in relation to income which is exempt shall be the aggregate of (i) the expenditure attributable to tax exempt income, (ii) and where there is common expenditure which cannot be attributed to either tax exempt income or taxable income then a sum arrived at by applying the formula set out thereunder. What the formula does is basically to “allocate” some part of the common expenditure for disallowance by the proportion that average value of the investment from which the tax exempt income is earned bears to the average of the total assets. It acknowledges that funds are fungible and therefore it would otherwise be difficult to allocate the sum constituting borrowed funds used for making tax-free investments. Given that Rule 8D(2)(ii) is concerned with only ‘common interest expenditure’ i.e. expenditure which cannot be attributable to earning either tax exempt income or taxable income, it is indeed incongruous that variable A in the formula will not also exclude interest relatable to taxable income.”

Clarification w.r.t. Fabrication of Garments Service received by Apparel Exporters

fiogf49gjkf0d

Circular No. 190/9/2015-ST dated 15.12.2015

Vide this Circular, CBEC has clarified that the services received by apparel exporters from third party for job work involves a process amounting to manufacture or production of goods, and thus would fall under negative list [section 66D (f)] and hence would not attract service tax. However, CBEC has also clarified that only those job works which involve a process on which duties of excise are leviable u/s. 3 of the Central Excise Act, 1944 would be covered under negative list in terms of Section 66D(f) read with section 65B (40) of the Finance Act, 1994 and hence applicability of service tax may be decided on case to case basis depending upon nature of agreement/contract entered into between service provider & service receiver and the service being provided.

Service Tax Payment due date extended – Tamilnadu and Puduchery

fiogf49gjkf0d

Notification Nos. 26/2015-ST dated 09.12.2015 and 27/2015-ST dated 18.12.2015 Circular No. 184/3/2015-ST dated 03.06.2015

Due date for payment of Service Tax for the month of November 2015 for all Service Tax assessees in the State of Tamil Nadu & in the Union Territory of Puducherry (except Mahe & Yanam) extended.

Suvaprasanna Bhatacharya vs. ACIT ITAT Bench “B” Kolkata Before N. V. Vasudevan, (J. M.) and Waseem Ahmed (A. M.) ITA No.1303/Kol /2010 A. Y. : 2006-07. Date of Order: 06-11-2015 Counsel for Assessee / Revenue: A.K. Tibrewal and Amit Agarwal / Sanjit Kr. Das

fiogf49gjkf0d
Section 271(1)(c) r.w 274 – For valid initiation of penalty proceedings it is essential that (i) Prima facie, the case may deserve the imposition of penalty should be discernible from the Order passed; and (ii) Notice must specify as to whether the Assessee was guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”.

Facts
The assessee is a professional artist having created many paintings. For AY 2006-07, the Assessee filed return of income declaring income of Rs.6.73 lakh. During the course of assessment proceeding, the AO found that the assessee had invested the sum of Rs. 68.79 lakh in units of mutual fund out of income from sale of paintings which was not disclosed in his return of income. The AO assessed the income of the assessee at Rs. 80.89 lakh and issued a show cause notice u/s.274. The assessee accepted the order of the AO and paid taxes due thereon. In his reply to Notice u/s. 274, the assessee submitted that the additional income assessed was out of the sale of art which was in the nature of personal effects and hence not a capital asset within the meaning of the definition of the said term u/s.2 (14) (ii). He explained that the paintings were kept for years over because of his aesthetic sense and also it gave him tremendous pleasure and pride of possession. Thus, the paintings were his “personal effects”. The assessee further explained that the sale of paintings was for the purpose of making investments in the units of mutual funds and to earn income from such investments for his livelihood. Therefore, it was contended by him that the incidence of sale cannot be construed as the adventure in the nature of trade. Thus, according to him, income earned out of the sales of paintings, which were nothing but the personal effects, was not taxable and the very basis of addition by the AO was not correct. It was pointed out that in the course of assessment proceedings, the facts were placed before the AO. However, to avoid litigation, the taxes were paid. It was contended that sine the assessment and penalty proceedings are two different proceedings, the Assessee is not precluded from urging the correct position in law during the penalty proceedings. The assessee thus submitted that imposition of penalty was unsustainable.

The above submissions did not find favour with the AO. The AO held that the assessee had deliberately tried to conceal his professional receipt by depositing it in the bank account not disclosed to the department. Such information was found out by the department. He had no option but to disclose it fully as the bank details were already with the department. The mistake was neither due to ignorance nor bona fide. The AO referred to the decision of the Supreme Court in the case of Dharmendra Textile Processors and others 306 ITR 277 and held that mens rea is not essential for attracting civil liabilities. Accordingly, he levied a penalty of Rs. 71.88 lakh u/s. 271(1)(c). On appeal by the Assessee, the CIT(A) confirmed the order of the AO.

Before the Tribunal, the assessee further submitted that the AO had not recorded his satisfaction in the order of assessment that the assessee is liable to be proceeded against u/s.271(1)(c). Further, the show cause notice issued u/s.274 did not specify as to whether the Assessee was guilty of having “furnished inaccurate particulars of income” or of having “concealed particulars of such income”.

Held:
The Tribunal noted that the source of funds for making investments in units of mutual funds was the starting point of enquiry by the AO. It was not in dispute that the source of funds for making such investments was the sale of assessee’s own paintings. Thus, if the painting are considered as “personal effects” then they cannot be regarded as “capital assets” within the meaning of section 2(14)(ii). Consequently, the receipts on sale of paintings would not be chargeable to tax.

Referring to the meaning of the term “personal effects” as per section 2(14)(ii), it noted that by the Finance Act, 2007, the definition of the term “personal effects” was substituted w.e.f. the 1st day of April, 2008 to exclude from its meaning the items of amongst others, drawings and paintings. Thus, till 31st March, 2008, drawing and paintings were considered as “personal effects” and hence, not as capital assets till then.

The Tribunal further noted that the sale of paintings was not done by the assessee as an adventure in the nature of trade. The paintings were kept for years over because of his aesthetic sense. It gave him tremendous pleasure and pride of possession. This aspect had not been disputed by the AO. Therefore, according to the tribunal, the paintings were his “personal effects”. Further, in the statement recorded u/s.131, the assessee had stated that the paintings were made as per creation desire of the assessee. Therefore, it accepted the contention of the assessee that the paintings were his “personal effects” and held that the penalty imposed qua the income from the sale of painting was not sustainable.

As regards the alternate contention of the assessee, the Tribunal agreed with the assessee that the order of assessment nowhere spells out or indicates that the AO was of the view that the assessee was guilty of either concealing particulars of income or furnishing inaccurate particulars of income. The offer to tax of income by the assessee has just been accepted. Relying on the Delhi High Court decision in the case of Ms. Madhushree Gupta vs. Union of India 317 ITR 107, the Tribunal observed that the position of law, both pre and post introduction of section 271(1B) is similar, inasmuch, the AO has to arrive at a prima facie satisfaction during the course of assessment proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings. Prima facie, the case may deserve the imposition of penalty should be discernible from the Order passed.

As regards the contention of the assessee that the show cause notice u/s.274 which is in a printed form does not strike out as to whether the penalty is sought to be levied for “furnishing inaccurate particulars of income” or “concealing particulars of such income”, the tribunal, relying on the Karnataka High Court decision in the case of CIT & Anr. vs. Manjunatha Cotton and Ginning Factory, 359 ITR 565 agreed that the Notice did not satisfy the requirement of law in as much as that it had not struck out the irrelevant part. Thus the show cause notice u/s. 274 was defective hence, the order imposing penalty was invalid and therefore, the penalty imposed was cancelled.

ITO vs. Superline Construction Pvt. Ltd. ITAT “A” Bench, Mumbai Before Shailendra Kumar Yadav (J. M.) and Rajesh Kumar (A. M.) ITA No. 3645/Mum/2014 A. Y. : 2007-08. Date of Order: 30.11.2015 Counsel for Assessee / Revenue: A. Ramachandran / P. Danial

fiogf49gjkf0d
Section 68 – In case of receipt of share application money from the alleged bogus shareholders, addition can only be made in the hands of the alleged bogus shareholders and not in the income of the company recipient.

Facts
This appeal, along with six others, by the Revenue is directed against respective orders of the CIT(A) in respect of seven different assessees. Since the appeals involve common issues, the same were heard together and disposed of by the Tribunal, by a consolidated order.

The assessee was a builder and a developer. The assessment was completed u/s. 143(3) r.w.s. 147. During the year, the assessee had received share application money to the tune of Rs.85 lakh from eight companies. After completing the assessment, the Assessing Officer received detailed report from the investigation wing alongwith copies of statement recorded from the concerned officials of the company. Based thereon, the assessment was re-opened and an addition of Rs.40 lakh was made on account of bogus share application money received from three different corporate entities, u/s. 68. On appeal, the CIT(A) deleted the addition.

Before the Tribunal, the revenue contended that the CIT(A) erred in deleting the addition without appreciating the fact that addition was made based on specific information provided by Investigation Wing of Income Tax Department. According to it, the investors had issued cheques towards alleged share application money in return of cash. It was submitted that the assessee had failed to discharge the onus cast upon it to prove the credit entries of share application money as required under the statute.

In reply, the assessee contended that it had fully discharged the burden of proof by establishing the identity, creditworthiness and genuineness of the transactions. It produced banking instruments as the documentary evidence and further substantiated the details regarding the investors with the documentary evidences as extracted from the website of the Ministry of Corporate Affairs. Further, the assessee relied on the Supreme court decision in the case of CIT vs. Lovely Exports (Pvt) Ltd., reported in [2008] 216 CTR 195 (SC) and few other tribunal decisions.

Held
The Tribunal noted that on similar issue of receipt of share application money, the Supreme Court had in the case relied on by the assessee, held that such receipt cannot be regarded as the undisclosed income of the assessee company and in case the department has information about the alleged bogus shareholders, then the department should proceed to reopen the individual assessments of the investors. Further, taking into account the facts and circumstances of the case and other decisions of the tribunals on a similar issue, the Tribunal upheld the order of the CIT(A) and the appeal filed by the Revenue was dismissed.

Co-operative Society – Uttar Pradesh Cooperative Societies Act, 1965 providing that every Co-operative Society shall be covered by the Right to Information Act, 2005 is unconstitutional.

fiogf49gjkf0d
MECON Indraprastha Sahakari Avas Samiti Ltd. and Ors. vs. State of U.P. and Ors. AIR 2016 (NOC) 170 (ALL)

Before the Lucknow bench of the Allahabad High Court, a challenge was raised to the constitutional validity of the provisions of section 113(2) of the Uttar Pradesh Cooperative Societies Act, 1965 whereby the state legislature enacted a provision which stipulated that the Right to Information Act, 2005 – enacted by Parliament – shall cover all cooperative societies in the state.

The provision of section 113(2) is as under : “113(2) Every co-operative society shall be covered by the Right to Information Act, 2005.”

The challenge to the constitutional validity of section 113(2) was premised on the basis that as a result of the amendment, all co-operative societies in the State were brought within the purview of the RT I Act, enacted by the Parliament, irrespective of whether or not these cooperative societies constituted public authorities within the meaning of section 2(h) of the Central Act, i.e. the RT I Act.

The Court held that the issue which was required to be considered was whether the state legislature could, by a legislative amendment to the Act, have mandated that all cooperative societies in the State would be governed by the RT I Act.

The court further held that unless the state legislature is competent to enact a law on the subject, it would not be open to it to provide that the RT I Act which has been enacted by the Parliament must apply to all co-operative societies in the State. This was clearly impermissible and fell outside the legislative competence of the state legislature. Hence, the provisions of section 113(2) were held to be unconstitutional.

Presentation of Government Grant

fiogf49gjkf0d
Background
For sustained agricultural growth and to promote balanced nutrient application, it is imperative that fertilisers are made available to farmers at affordable prices. With this objective, urea being the only controlled fertiliser, is sold at statutory notified uniform sale price, and decontrolled Phosphatic and Potassic fertilisers are sold at indicative maximum retail prices (MRPs). The problems faced by the manufacturers in earning a reasonable return on their investment with reference to controlled prices, are mitigated by providing support under the New Pricing Scheme for Urea units and the concession Scheme for decontrolled Phosphatic and Potassic fertilisers. The statutorily notified sale price and indicative MRP is generally less than the cost of production of the irrespective manufacturing unit. The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers.

Query
Whether subsidy received by the manufacturers should be presented as ‘other income’ or as ‘revenue’?

Response
Theoretically, there could be two views.

View 1
Paragraph 29 of Ind AS 20 Accounting for Government Grants and Disclosure of Government Assistance states “Grants related to income are presented as part of profit or loss, either separately or under a general heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.” Since the subsidies are paid to the manufacturer, the same cannot be reflected as revenue of the manufacturer. It should be presented as ‘other income’. Further, since the subsidy is not related to providing relief on specific expenditure, the same cannot be deducted from expenses.

View 2
The benefit of the subsidy is meant for the farmers not for the manufacturer of fertilisers. This is a government grant to the farmers, not to the manufacturers. As far as the manufacturer company is concerned, it is receiving revenue at fair value from the farmers and the government. In other words, the government is paying the subsidy (part of sale proceeds) to the manufacturer on behalf of the farmer. Therefore, the government should be seen more as a customer, rather than as a provider of grant to the manufacturer.

Consider the following definitions under Ind AS 20:

Government assistance is action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria. Government assistance for the purpose of this Standard does not include benefits provided only indirectly through action affecting general trading conditions, such as the provision of infrastructure in development areas or the imposition of trading constraints on competitors.

Government grants are assistance by government in the form of transfers of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.

Both the above definitions entail compliance with past and future onerous conditions by the manufacturer to become eligible for the subsidy. For example, this is clearly seen in the Capital Investment Subsidy Scheme, which requires the manufacturer to make investments in plant and machinery of a specified value in backward regions and also imposes other conditions, such as, with respect to setting up social infrastructure and employment generation.

In the fertiliser subsidy, the manufacturers do not have to comply with such onerous conditions, and hence it is not a government grant from the manufacturer perspective.

Conclusion
The author believes View 2 is more appropriate for reasons already mentioned above. A simple analogy is the subsidy on cooking gas cylinders. In the past, the subsidy was paid to the manufacturer on behalf of the consumers (who paid a subsidised price for the cylinder). Now the consumers have to pay full fair price to the manufacturers, and the Government directly credits the subsidy to the consumers. Similarly, with respect to fertilisers, it can be argued that the subsidy is to the farmer, and not to the fertiliser manufacturer.

[2016] 67 taxmann.com 138 (Delhi – Trib.) Krishak Bharati Cooperative Ltd vs. ACIT A.Ys.: 2010-11 & 2011-12, Date of Order: 9th March, 2016

fiogf49gjkf0d
Article 25(4) of India-Oman DTAA –ICo is eligible to claim foreign tax credit (FTC) in respect of dividend income received from Omani Company, as dividend exemption was granted in Oman for attracting investments.

Facts
The Taxpayer an Indian co-operative society established a branch office (BO) in Oman. BO created a PE for the Taxpayer in Oman under the DTAA . Taxpayer also held shares in another company in Oman, from which the Taxpayer had received dividend income. Such dividend income was effectively connected with the BO. Such dividend income was exempt from tax in Oman. Vide its letter, Ministry of Finance of Oman clarified that dividend exemption was granted with the object of promoting economic development within Oman by attracting investments.

Taxpayer claimed tax credit for the Omani tax on dividend income which would have been payable in Oman but not paid by reason of exemption granted under the Omani tax Laws.

AO however contended that the dividend exemption exists across the board with no exceptions in Oman, thus it cannot be construed as an incentive granted for economic development and therefore denied such credit.

Held
Article 25(4) of India-Oman DTAA provides that tax payable for the purpose of computing the tax credit shall be deemed to include the tax which would have been payable but not paid by reason of for certain tax incentives granted under the laws of the source state for promoting economic development.

Ministry of Finance of Oman had clarified that the exemption on dividend income was introduced to promote economic development. Omani Tax Law can be clarified only by government of Oman and interpretation given by it must be adopted in India.

Therefore, by virtue of Article 25(4) of the DTAA Taxpayer is entitled to foreign tax credit in respect of tax that would have been payable in Oman but for the exemption.

TS-62-ITAT-2016 (CHNY) Foster Wheeler France SA vs. DDIT A.Ys.: 2008-09 & 2009-10, Date of Order: 5th February, 2016

fiogf49gjkf0d
Section 9(1)(vii) of the Act; Article 12(4) of India-USA DTAA – since monitoring and review services provided to a specialist company by an American company ‘make available’ technical knowledge, etc. the payments made were FTS under India-USA DTAA.

Facts
The Taxpayer was a French company engaged in providing technical and engineering services. The Taxpayer had entered into an agreement with an Indian company for providing technical and engineering services in India. For providing these services, Taxpayer deputed his employees to India. Taxpayer also entered into another agreement with its affiliate, a USA Company (“USCo”) as per which USCo was required to monitor and review the work done by the employees of the taxpayer, deputed to India. As part of its services US Co was required to share best practices in engineering services in the form of written procedure, forms, and specifications to be adopted in execution of the work in India.

Though the TPO did not consider it necessary to make any adjustment, invoking the provisions of section 40(a)(i) of the Act, the AO disallowed the payments to USCo since the Taxpayer had not withheld tax from these payments. AO contended that the payment made to USCo amounts to FTS and is subject to withholding of taxes in India. Taxpayer argued that the services rendered by US Co did not make available any technical knowledge and hence does not qualify as FTS under the DTAA and no withholding is required on such payments.
The issues before the Tribunal were:

(i) Whether, as per the provisions of section 9(i)(vii) of the Act, the services provided by USCo were in the nature of FTS?

(ii) Whether, as per the provisions of Article 12(4)(b) of India-USA DTAA , the payments received by USCo could be characterised as FTS?

Held
As regards the Act
The payments made by the Taxpayer for provision of services in the nature of managerial, technical and consultancy services and utilised by the Taxpayer in its business in India, is liable to tax in India in terms of Explanation 2 to Section 9(1)(vii) as FTS.

As regards India-USA DTAA
To qualify as Fee for included services (FIS) under the DTAA , services should satisfy the “make available” condition.

Taxpayer received best practices in different engineering specifications as well as engineering details from US Co to be adopted in execution of the different phases of the project in India.

U S Co provided the best practices by way of written procedures and specifications and details. When the procedures and specifications are provided to the Taxpayer, which is also a specialized company in engineering and execution of construction, the specifications and details provided can very well be used in the business of engineering and construction.

Moreover, these specifications and procedures made available to the Taxpayer by USCo can very well be used by the Taxpayer for execution of other projects. Also, the Taxpayer was not a layman but was a specialist in engineering and construction.

The information, expertise, execution plan, project budget, technical standards and quality management standards provided by USCo is absorbed by the Taxpayer who is capable of deploying such technology in future without depending on USCo.

Hence, it could very well use these for its future business without any assistance from USCo. Hence, USCo had ‘made available’ its technical knowledge, expertise, knowhow, etc. to the Taxpayer.

[2016-TIOL-374-CESTAT-DEL] M/s Umax Packaging Ltd vs. Commissioner of Central Excise & Service Tax, Jaipur-II

fiogf49gjkf0d
In absence of any proof of evidence of any suppression, misstatement and collusion with intent to evade payment of duty invocation of longer period of limitation and penalties for normal period not justified.

Facts
Appellant, a manufacturer of excisable goods availed CENVAT credit on certain disputed goods which was objected by the department and was confirmed by the Commissioner (Appeals) by invoking extended period of limitation.

Held:
The Tribunal noted that the dispute regarding eligibility of CENVAT credit of the goods had not attained finality and there were conflicting decisions on the issue and therefore the Appellant could have entertained a reasonable belief that credit was allowable. Further in absence of any evidence brought on record to prove suppression, misstatement, collusion etc. extended period cannot be invoked. The demand is confirmed for the normal period along with interest setting aside penalty.

[2016-TIOL-400-CESTAT-MUM] PrecisionMetals vs. Commissioner of Central Excise, Raigad

fiogf49gjkf0d
The goods manufactured on job work basis is exempted under notification 214/86 on the ground that the excise duty is charged on the full value of the final product including the value of job work goods, the job work goods cannot be said to be exempted goods.

Facts
The Appellant, a job worker availed CENVAT credit on the inputs used in the manufacture of goods on job work basis. Exemption of excise duty was availed under Notification No. 214/86-CE as the principal supplier had undertaken to discharge excise duty either on the job work goods or on the final product in which job work intermediate goods is used. The adjudicating authority confirmed the demand @ 10% of the value of the goods manufactured for reversal of credit in terms of Rule 6 of the CENVAT Credit Rules, 2004 on the ground that exempted goods were manufactured.

Held
The Tribunal relying upon various judicial pronouncements held that Notification No. 214/86 provides that the principal supplier of raw material undertakes to discharge excise duty either on the job work goods or on the final product in which the job work goods is used. Accordingly, it cannot be said that the job work goods are exempted from payment of excise duty. Even if any duty is charged at the job worker’s end the same shall be available as CENVAT credit to the principal supplier and only for procedural convenience, Notification was issued. Therefore, Rule 6(3)(b) which is applicable only on the clearance of exempted goods shall not apply and accordingly the demand is set aside.

[2016-TIOL-399-CESTAT-MUM] Arbes Tools P. Ltd vs. Commissioner of Central Excise, Mumbai-II

fiogf49gjkf0d
When the imported material was used for manufacturing final product, credit taken on a photocopy of courier bill of entry was allowable.

Facts
The Appellant imported inputs and utilized the same in manufacture of the final product which was cleared on payment of duty. The lower authorities denied the benefit of CENVAT credit stating that original bill of entry was not produced and photocopy of a courier bill of entry is not a valid document under Rule 9 of the CENVAT Credit Rules, 2004.

Held
The Tribunal noted that there is no dispute that the material on which credit is taken was imported and used for manufacturing the product. Therefore CENVAT credit cannot be denied on mere technical grounds and the appeal was allowed.

[2016] 65 taxmann.com 88 (Ahmedabad-CESTAT) Commissioner of Central Excise & Service Tax, Surat vs. Miranda Tools

fiogf49gjkf0d
Mobile services and courier services are entitled to CENVA T credit, since they are used in different ways in relation to manufacture of final product.

Facts
The Issue before the Hon’ble Tribunal was whether mobile services and courier services availed by the manufacturer for the period April 2008 to June 2011 would be available as input services in term of Rule 2(I) of CCR, 2004 so as to enable CENVAT credit thereof.

Held
The Tribunal concurred with the view taken by Commissioner (Appeals) and decided the matter in favour of the assessee. Commissioner (Appeals) had decided that mobile phones were provided by the company to its senior executives so that they can carry out business activities/job performance easily. The mobile services were utilised/consumed in or in relation to performance of their duties such as purchasing/procurement of inputs or capital goods or consumables, accounting of materials, manufacture of the finished goods, clearance of finished goods, export of finished goods, marketing of goods manufactured, sales promotion etc. Further, the mobile connections were also in the name of the company and hence the bills were raised by the service providers in the name of the company which paid such bills. Therefore, CENVAT credit of mobile services was allowed. As regards, courier services, it was found that assessee received courier services for dispatch of various business correspondence to the supplier/customer/branch office/ agents office etc. including sending various bills and other related documents to the head office for accounting and internal audit purposes and also for procurement of raw materials, export of the finished goods and for domestic sale and for sending samples of the finished goods to the customers. Commissioner (Appeals) therefore held that in different ways, the courier services were used in or in relation to manufacture of the final products. Therefore, CENVAT credit of courier services was also allowed.

2016] 65 taxmann.com 196 (Mumbai-CESTAT) Commissioner of Service Tax, Mumbai-II vs. MMS Maritime (India) (P.) Ltd

fiogf49gjkf0d
After 01/04/2011, CENVA T credit of “rent-acab” service is not allowed due to specific exclusion of the same from definition of input services in terms of Rule 2(I)(B) of CENVA T Credit Rules, 2002, although it is essential for providing output services, but all other services essential for providing output services are to be allowed.

Facts
The Appellant is the provider of manpower supply services to foreign clients which is export of service. It filed refund claim for unutilised CENVAT credit in respect of input services, which was used in respect of export of output services. Such services included inter-alia rent-acab services used for conveyance of employees, courier services, communication services, renting of immovable property services and short term accommodation services used in relation to training. The refund claim was rejected on the ground that such services do not qualify as input services for providing output services.

Held
The Tribunal held that any service whether it is used for providing output services or otherwise, cannot be decided in isolation but it is necessary to see what the output service is and accordingly it can be decided whether the service is input service for providing a particular output service. Having regard to nature of output service i.e. manpower supply service, it was held that, all the services mentioned above, are essential for providing output service and hence would qualify as input services and CENVAT credit of the same are allowable/refundable. However, in light of amendment to Rule 2(I)(B) of CENVAT Credit Rules, 2004 with effect from 01/04/2011, on account of specific exclusion, “rent-a-cab” services would not qualify as input services even though the same are used for conveyance of staff.

[2016-TIOL-403-CESTAT-MUM] Applied Micro Circuits India Pvt. Ltd vs. Commissioner of Central Excise, Pune-III

fiogf49gjkf0d
Credit of service tax paid on outdoor catering services, life insurance services after 01/04/2011 being services received for personal use of employees cannot be allowed.

Facts
CENVAT credit is denied to the Appellants on service tax charged on outdoor catering and life insurance services received after 01/04/2011 contending that after the amendment to the definition of input service, services used primarily for personal use or consumption of any employee are specifically excluded and therefore credit cannot be allowed. It was argued that such services were in relation to the business activity and were included in the value of service rendered by them. Reliance was placed on the decision of Hindustan Coca Cola Beverages Pvt. Ltd vs. Commissioner of Central Excise [2014]-TIOL-2460-CESTAT-MUM] (digest provided in BCAJ February 2015).

Held
The Tribunal however, distinguished the decision of Hindustan Coca Cola (supra) by holding that the services of outdoor catering and life insurance are essentially for the personal use or consumption of the employees and therefore could not be allowed. It was also categorically provided that if outdoor catering services are used for an annual conference of dealers or shareholders meet etc., it would be eligible for credit since then it is not primarily for personal use of employees. Similarly, life insurance is also for the personal use of the employee as its benefit goes to the employee or his family. Accordingly the appeal was dismissed.

[2016-TIOL-382-CESTAT-MUM] DSP Meryll Lynch Ltd. vs. Commissioner of Service Tax, Mumbai

fiogf49gjkf0d
Introduction of new entry and inclusion of certain services in that entry would presuppose that there was no earlier entry covering the said services and accordingly merchant banking and advice on mergers and acquisition can be taxed only under Banking and Financial Services with effect from 16/07/2001 and are not covered under management consultancy service.

Facts
The Appellant provided various financial services viz. advisory services, retainership for providing opinions, advisory for mergers and acquisitions, merchant banking services etc. Their income included fees for these services as well as management fees earned by their subsidiary, fees for underwriting Government securities and other miscellaneous income. The department contended that all services except underwriting services are covered under “management consultancy service”. However it was argued that interalia as regards M&A services the entry of management consultancy should be interpreted in contextual manner and M&A advisory is technical and restrictive and does not relate to running of an organization. Merchant banking services are regulated under SEBI Rules and Regulations and that the services rendered were liable only from August 2001 under the category of “banking and financial services” which was brought into the service tax net from 16/07/2001. In the present case the period involved is April 2000 – December 2001.

Held
The Tribunal relying on the decision of Indian National Shipowners Association [2008-TIOL-633-HC-MUM-ST] wherein the High Court held that introduction of a new entry and inclusion of certain services in that entry would presuppose that there was no earlier entry covering the said services held that the service of banking and financial service was introduced with effect from 16/07/2001 incorporating the various entries viz. merchant banking, mergers and acquisition etc. and thus the services were not liable under management consultancy service prior to the said date. It was noted that the definition of management consultancy remained the same even after introduction of banking and financial service and thus the service was brought to tax only after introduction of the new entry. Further, it was held that the term management consultancy refers to consultancy regarding the affairs of an organisation and does not relate to activities of mergers and acquisition which is highly technical and restrictive term. Accordingly, the demand of fees received in relation to mergers and acquisition, merchant banking and retainership was set aside. As regards fees received by the subsidiary company it was held that the same related to services provided by the subsidiary which was a separate legal entity and cannot be considered as income of the Appellant merely because the income is shown in the consolidated financial statement which is a mere statutory requirement. Further, it was held that underwriting of Government securities was not taxable by virtue of Board Circular No. 126/8/2010 dated 10/08/2010. Further in relation to the miscellaneous income, it was held that the same are in the nature of adjustments of expenses/debt etc. and there is no service involved in these activities. Thus the entire demand was set aside.

[2016-TIOL-105-HC-MUM] Mercedes Benz India Pvt. Limited vs. The Commissioner of Central Excise, Pune

fiogf49gjkf0d
To determine the method of apportionment of input credit on common input services attributable to manufacturing and trading activities prior to 01.04.2011, the matter remanded to the Tribunal.

Facts
The Appellant, a manufacturer of motor vehicles also imported motor vehicles and sold them in domestic markets and therefore was a manufacturer as well as a trader. The Revenue contended that credit of service tax paid on common input services attributable to the activity of import and sale of cars viz. trading activity which is an exempted service is not available which is not contested. The question is about the true and correct method of quantifying the credit relatable to the trading activity for reversal. The Tribunal held that the method prescribed for arriving at the value of trading of goods vide clause (c) of Explanation-1 for the purpose of reversal under rule 6(3) of the CENVAT credit Rules, 2004 being the difference between sale price and cost of goods sold or 10% of the cost of goods sold, whichever is more is not retrospective in nature since the same was issued on 01/03/2011 and it came into force on 01/04/2011. Accordingly, it was held that service tax paid on common input services should be apportioned in the ratio of trading turnover to total turnover (trading as well as manufacturing turnover). Aggrieved by the same the present appeal is filed.

Held
The High Court held that the Tribunal has misdirected itself completely when it has concluded that clause (c) of Explanation 1 inserted w.e.f. 01/04/2011 has been adopted to encourage the trading of the goods rather than the manufacturing of the goods (otherwise criterion should have been same viz. Based upon turnover or value addition) and thus the common input services before such date should be apportioned in the same ratio as the turnover of manufactured and traded cars. The court held that firstly the Tribunal should refer to the substantive Rule as operative prior to 01/04/2011 and then arrive at a conclusion in relation to the explanation introduced with sub-clauses with effect from 01/04/2011. Accordingly for determination of the fraction/percentage to be applied to apportion the input credit relatable to the trading activity, the matter was remanded to the Tribunal.

Transfer pricing – S. 92C r.w.s. 144C – Where petitioner is not a foreign company and Transfer Pricing Officer has not proposed any variation to return filed by petitioner, neither of two conditions of section 144C being satisfied, petitioner is not an ‘eligible assessee’ and, consequently, Assessing Officer is not competent to pass draft assessment order u/s. 144C(1)

fiogf49gjkf0d
Honda Cars India Ltd. vs. Dy. CIT; [2016] 67 taxmann. com 29 (Delhi)

The petitioner, an Indian company, was engaged in the business of manufacture and sale of passenger cars. It was a subsidiary company of Japanese company. It purchased raw material, spare parts, capital goods etc. from Honda Japan and cars were manufactured in India under the technical collaboration agreements and paid royalty. On reference, the TPO passed an order u/s. 92CA(3), but no variation was proposed to the returned income of the petitioner. However, the Assessing Officer passed the impugned draft assessment order u/s. 144C and made disallowance u/s. 40(a)(i) in respect of payments made by the petitioner to non-resident associated enterprise for non-deduction of TDS u/s. 195.

The Delhi High Court allowed the writ petition filed by the assessee and held as under:

“i) A reading of section 144C(1) shows that the Assessing Officer, in the first instance, is to forward a draft of the proposed order of assessment to the ‘eligible assessee’, if he proposes to make any variation in the income or loss return which is prejudicial to the interest of such assessee. The draft assessment order is to be forwarded to an ‘eligible assessee’ which means that for the section to apply a person has to be an ‘eligible assessee’.

ii) Section 144C(15)(b) defines an ‘eligible assessee’ to mean (i) any person in whose case the variation referred to in s/s. (1) arises as a consequence of the order of the Transfer Pricing Officer passed u/s. 92CA(3); and (ii) any foreign company.

iii) In section 144C(15)(b), the term ‘eligible assessee’ is followed by an expression ‘means’ only and there are two categories referred therein. The use of the word ‘means’ indicates that the definition of ‘eligible assessee’ for the purposes of section 144C(15)(b) is a hard and fast definition and can only be applicable in the above two categories.

iv) First of all, the petitioner is not a foreign company and the Transfer Pricing Officer has not proposed any variation to the return filed by the petitioner. The Assessing Officer cannot propose an order of assessment that is at variance in the income or loss return. The Transfer Pricing Officer has accepted the return filed by the petitioner. Neither of the two conditions being satisfied in the case of the petitioner, the petitioner for the purposes of section 144C(15) (b) is not an eligible assessee. Since the petitioner is not an eligible assessee in terms of section 144C(15) (b), no draft order can be passed in the case of the petitioner u/s. 144C(1).

v) In view of the above, it is clear that the petitioner, not being an ‘eligible assessee’ in terms of section 144C(15)(b), the Assessing Officer was not competent to pass the draft assessment order u/s. 144C(1). The draft assessment order dated 31-3-2015 is accordingly quashed.”

TDS – Consequence of failure to deduct or pay (Time Limit for passing order) – Section 201(3) – A. Ys. 2008-09 and 2009-10 – Section 201(3), as amended by Finance Act No.2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(1) could be passed for which limitation had already expired prior to amended section 201(3) as amended by the Finance Act No. 2 of 2014 came into force:

fiogf49gjkf0d
Tata Teleservices vs. UOI; [2016] 66 taxmann.com 157 (Guj)

The assessee was engaged in the business of providing telecommunication services and selling service products across the country. The assessee was served notices/summons u/s. 201(1)/(1A) in December, 2014 in connection with TDS proceedings concerning assessment years 2008-09 and 2009-10. The assessee contended that section 201(3) inserted vide Finance (No. 2) Act, 2009 with effect from 1-4-2010 provided period of limitation of two years from the end of financial year in which TDS statement is filed and four years from the end of financial year where the statement had not been filed. Since the assessee regularly filed TDS statements, period for passing order u/s. 201(3) for relevant assessment years expired on 31-3-2011/2012. Hence the assessee submitted that the notices issued in December, 2014 were time-barred. However, the Assessing Officer rejected the arguments of the assessee and held that the notices were valid and within the time-period relying upon the amended section 201(3) vide the Finance Act, 2014 which prescribed a common period of limitation i.e. seven years from the end of financial year in which payment was made.

The assessee filed a writ petition before the Gujarat High Court and contended that amendment to section 201(3) by Finance Act, 2014 was expressly made prospective with effect from 1-10-2014 and therefore the impugned notices/summons for financial years 2007-08 and 2008- 09 were erroneously issued by revenue. The assessee submitted that the proceedings had already become time barred in view of the provisions of section 201(3) prior to amendment in section 201(3) by the Finance Act 2014.

The Gujarat High Court allowed the writ petitions and held as under:

“i) It is required to be noted that in the instant cases, limitation for passing orders as per the provisions prevailing at the relevant time and even as provided u/s. 201(3)(i) as amended by Finance Act of 2012 had already expired on 31-3-2011 and 31-3-2012, respectively.

ii) Considering the fact that while amending section 201 by Finance Act, 2014, it has been specifically mentioned that the same shall be applicable with effect from 1-10- 2014 and even considering the fact that proceedings for financial years 2007-08 and 2008-09 had become time barred and/or for the aforesaid financial years, limitation u/s. 201(3)(i) had already expired on 31-3- 2011 and 31-3-2012, respectively, much prior to the amendment in section 201 as amended by Finance Act, 2014 and therefore, as such a right has been accrued in favour of the assessee.

iii) Considering the fact that wherever legislature wanted to give retrospective effect so specifically provided while amending section 201(3) (ii) as was amended by Finance Act, 2012 with retrospective effect from 1-4-2010, it is to be held that section 201(3), as amended by Finance Act No. 2 of 2014 shall not be applicable retrospectively and therefore, no order u/s. 201(1) can be passed for which limitation had already expired prior to amended section 201(3) as amended by the Finance Act No. 2 of 2014.

iv) Under the circumstances, the impugned notices/ summonses cannot be sustained and the same deserve to be quashed and set aside and writ of prohibition, as prayed for, deserves to be granted.”

Reassessment in case of dead person – Sections 147, 148 and 159 – A. Y. 2008-09 – Where department intended to proceed u/s. 147 against assessee when he was already dead, it could have been done so by issuing a notice to legal representative of assessee within period of limitation for issuance of notice

fiogf49gjkf0d
Vipin Walia vs. ITO; [2016] 67 taxmann.com 56 (Delhi)

A notice u/s. 148 dated 27th March 2015 was addressed by the ITO to one Mr. Inder Pal Singh Walia, seeking to reopen the assessment for A. Y. 2008-09. The notice was returned unserved to the Department with the postal authorities endorsing on it the remarks “Addressee expired”. Mr. Inder Pal Singh Walia had expired on 14th March 2015. In other words, the notice dated 27th March 2015 had been addressed to a dead person. The ITO then wrote letter to the petitioner the legal representative on 15/06/2015 proposing to continue the reassessment proceedings. On 6th July 2015, the Petitioner wrote to the ITO pointing out that his father Shri Inder Pal Singh Walia had expired on 14th March 2015 and that the proceedings initiated u/s. 148 of the Act were barred by limitation. Additionally, it was stated that he was unaware of the financial affairs or transactions carried on by his late father. On 18th July 2015, the ITO took the stand that since the intimation of the death of Shri Inder Pal Singh Walia on 14th March 2015 was not received by her office “therefore the notice was not issued on a dead person”.

The Delhi High Court allowed the writ petition filed by the petitioner and held as under:

“If department intended to proceed u/s. 147, it could have been done so prior to period of limitation by issuing a notice to legal representative of deceased assessee and beyond that date it could not have proceeded in matter even by issuing notice to Legal Representatives of assessee. Therefore, subsequent proceedings u/s. 147 against petitioner were wholly misconceived and were to be quashed.”

Loss – Set-off – Section 74 r.w.s. 50 – A. Y. 2005- 06 – Where deemed short-term capital gain arose on account of sale of depreciable assets that was held for a period to which long-term capital gain would apply, said gain would be set-off against brought forward long-term capital losses and unabsorbed depreciation

fiogf49gjkf0d
CIT vs. Parrys (Eastern) (P.) Ltd.; [2016] 66 taxmann.com 330 (Bom)

The respondent-assessee had for the subject assessment year inter alia disclosed an amount of Rs.7.12 crore as deemed short-term capital gain u/s. 50. This deemed short-term capital gain arose on account of the sale of depreciable assets. This deemed short-term capital gain was set-off against brought forward long-term capital losses and unabsorbed depreciation.

The Assessing Officer held that in view of section 74, such set-off on short-term capital gain against the longterm capital gain was not permitted. Thus, disallowed the set-off of brought forward long-term capital losses and unabsorbed depreciation against the deemed shortterm capital gain of Rs.7.12 crore. The Commissioner (Appeals) and the Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49. It does not change the character of the capital gain from that of being a long-term capital gain into a short-term capital gain for purpose other than section 50. Thus, the respondentassessee was entitled to claim set-off as the amount of Rs. 7.12 crores arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long-term capital gain apply. Thus, for purposes of section 74, the deemed short-term capital gain continues to be long-term capital gain.

ii) Moreover, it appears that the revenue has accepted the decision of the Tribunal in Komac Investments & Finance (P.) Ltd. vs. ITO [2011] 132 ITD 290/13 taxmann.com. 185 (Mum.) as no appeal was apparently being filed from that order.”

Charitable or religious trust – Sections 11 and 32 – A. Y. 2009-10 – Section 11(6) inserted by the Finance (No. 2) Act, 2014 denying depreciation while computing income of charitable trust, is prospective in nature and operates with effect from 1-4-2015 – For the relevant year the depreciation is allowable

fiogf49gjkf0d
DIT (Exemp) vs. Al- Ameen Charitable Fund Trust; [2016] 67 taxmann.com 160 (Karn);

The assessee was a charitable institution registered u/s. 12AA. In the course of assessment, the Assessing Officer denied exemption u/s. 11, read with section 10(23C) and also made an addition of income on account of disallowance of depreciation. The Commissioner (Appeals) as well as the Tribunal allowed assessee’s claim for depreciation.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) It is to be noticed that while in the year of acquiring the capital asset, what is allowed as exemption is the income out of which such acquisition of asset is made and when depreciation deduction is allowed in the subsequent years, it is for the losses or expenses representing the wear and tear of such capital asset incurred if, not allowed then there is no way to preserve the corpus of the trust for deriving its income. As such, the arguments advanced by the revenue apprehending double deduction is totally misconceived.

ii) Section 11(6) was inserted with effect from 1-4-2015 by Finance Act No. 2/2014. The plain language of the amendment establishes the intent of the legislature in denying the depreciation deduction in computing the income of charitable trust is to be effective from 1-4- 2015. This view is further supported by the Notes on Clauses in Finance [No. 2] Bill 2014, memo explaining provisions and circulars issued by the Central Board of Direct Taxes in this regard. “The said amendment shall take effect from 1-4-2015 and will accordingly apply in relation to the assessment year 2015-16 and subsequent assessment years”.

iii) In view of above, it is held that the Tribunal is correct in holding that depreciation is allowable u/s. 11 and there is no double claim of capital expenditure as held by the Assessing Officer.”

Capital gains – Section 45(4) – A. Y. 1991-92 – Where natural partners of a firm transferred their rights in firm to artificial partner, being a company for its equity shares, such transfer would not amount to distribution or transfer of capital assets chargeable to capital gain

fiogf49gjkf0d
Pipelines India vs. ACIT; [2016] 67 taxmann.com 112 (Mad)

The partners of assessee-firm, constituted a private limited company. The company was admitted as partner in the assessee-firm. Later on, the natural partners executed a release deed giving up all their rights in assesseefirm, in favour of the company. As a consequence, the company became absolute owner of the assessee-firm. The natural partners were allotted shares in the company for relinquishing their rights in the assessee-firm. The Assessing Officer held that there was a transfer of assets by way of distribution of capital assets on dissolution of the assessee-firm. He accordingly computed capital gain and made a demand. The Tribunal upheld order of the Assessing Officer holding that it was a dissolution of the firm and not conversion of the firm into a company since the relationship inter se between the partners had come to an end, the moment they released their shares in favour of the company.

On appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

“i) F or attracting section 45(4), the following conditions are to be satisfied:

(a) profits and gains should arise;
(b) from the transfer of a capital asset;
(c) by way of distribution of capital assets;
(d) on the dissolution of a firm or other association of persons or body of individuals not being a company or a co-operative society and
(e) or otherwise.

ii) Unless these conditions are satisfied, section 45(4) would not get attracted. Every distribution of capital assets may not lead to the attraction of section 45(4) unless it happens on the dissolution of a firm or other entity. Similarly, every distribution of capital assets on the dissolution of a firm may not attract section 45(4) unless it was a case of transfer of a capital asset by way of such distribution.

iii) The expression ‘transfer’ is defined in section 2(47) to mean several things. A sale, exchange or relinquishment of the asset or the extinguishment of any rights therein are all covered by the expression ‘transfer’.

iv) In the case on hand, the partners have taken equity shares in the private limited company that was inducted as the partner. Therefore, whatever rights that they had in the capital assets of the firm by way of being its partners, continue to exist in the form of equity shares that they held in the private limited company. In other words, one form of ownership that they had as partners of the partnership firm, got converted into another form. Hence, this is not a case where there was either a transfer of a capital asset or the distribution of a capital asset. This aspect has been completely lost sight of by all the authorities.

v) Therefore, the questions of law are answered in favour of the assessee/appellant. The tax case appeal is allowed.”

Capital or revenue receipt – Section 17(3)(iii) – A. Y. 2008-09 – Amount received by way of compensation against employment contract as goodwill and one time settlement of proposed employment – Capital receipt and not “profit in lieu of salary” – Assessee entitled to refund of tax deducted at source

fiogf49gjkf0d

CIT vs. Pritam Das Narang; 381 ITR 416 (Del):

Under an employment agreement with a company ACEE, the assessee was to be employed as the chief executive officer of the company from July 1, 2007. The company later informed the assessee that there had been a sudden change of business plan and it would not be able to take him on board as promised under the employment contract. The assessee proposed that he be paid compensation upon which the company made a payment of Rs. 1,95,00,000/- to the assessee as “a one time payment for non-commencement of employment as proposed”. The company deducted tax of Rs. 22,09,350/- on this payment and paid him a sum of Rs. 1,70,90,650/-. The assessee did not offer this sum to tax claiming it to be capital receipt. The Assessing Officer assessed the sum as salary u/s. 17(3)(iii). The Commissioner (Appeals) and the Tribunal deleted the addition.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) Section 17(3)(iii)(A) presupposes the existence of an employment, i.e., a relationship of employee and employer between the assessee and the person who makes the payment of “any amount” in terms of s. 17(3)(iii) of the Act. Therefore, the words in section 17(3)(iii) cannot be read disjunctively to overlook the essential facet of the provision, the existence of “employment” i.e. a relationship of employer and employee between the person who makes the payment of the amount and the assessee.

ii) It was a case where there was no commencement of employment and that the offer by the company to the assessee was withdrawn even prior to the commencement of such employment. The amount received by the assessee was a capital receipt and could not be taxed as “profit in lieu of salary”.

iii) The assessee was entitled to the refund of the tax deducted at source on Rs. 1,95,00,000/-.”

Business expenditure – Interest on borrowed funds – Section 36(1)(iii) – A. Y. 2005-06 – Assessee advancing money to its sister concern owning 89% of share capital free of interest – Holding company investing money for purpose of business in its subsidiary company amounts to expense on account of commercial expediency – Assessee entitled to deduction u/s. 36(1)(iii)

fiogf49gjkf0d
Bright Enterprises Pvt. Ltd. vs. CIT; 381 ITR 107 (P&H):

In the A. Y. 2005-06, the assesee had advanced moneys to its sister concern of which the assessee was owning 89% of equity capital. The Assessing Officer disallowed the interest paid by the assessee on the loans taken from banks observing that if the assessee did not advance money to its sister concern without charging interest, it would be left with sufficient funds to return the bank loan and the assessee would not have to pay interest to the bank. The Assessing Officer further held that the advance made to the assessee’s sister concern was not for business purposes, since the assessee had no business dealings with the sister concern. The Tribunal upheld the disallowance on the ground that the assessee failed to establish that the money advanced by the assessee to the sister concern was used as a measure of commercial expediency.

On appeal by the assessee, the Punjab and Haryana High Court reversed the decision of the Tribunal and held as under:

“i) Whether the amount was debited to the account of the sister concern in respect of the payment made or the amount was actually paid to the sister concern and used by it for the purpose of business, was immaterial. Either way, the amount was used for the business of the sister concern. It was not even suggested that the advance was used by the sister concern for the purpose other than for the purpose of its business.

ii) In the memorandum of appeal, the assessee expressly stated that it had advanced the amount to its sister concern as a measure of commercial expediency for the purpose of business. This assertion was never denied. The assessee owned 89% of the equity capital of the sister concern. When a holding company invested money for the purpose of the business of its subsidiary, it must necessarily be held to be an expense on account of commercial expediency. A financial benefit of any nature derived by the subsidiary on account of the amount advanced to it by the holding company would not merely indirectly but directly benefit its holding company.

iii) There would be direct benefit on account of the advance made by the assessee to its sister company, if it improved the financial health of the sister company and made it a viable enterprise. But it was not necessary that the advance results in a positive tangible benefit. Thus the assesee was entitled to the deduction u/s. 36(1)(iii) of the Act.”

Business expenditure – TDS – Disallowance u/s. 40(a)(i), (ia) – A. Y. 2008-09 – Payment made for purchase of software as product and for resale in Indian market – Not royalty – Assessee not liable to deduct tax at source – Payment not to be disallowed

fiogf49gjkf0d
Prin. CIT vs. M. Tech India P. Ltd.; 381 ITR 31 (Del):

For the A. Y. 2008-09, The Assessing Officer disallowed payment made in respect of software without deduction of tax at source u/s. 40(a)(i) and (ia), holding that the payments were in the nature of royalty. The Commissioner (Appeals) accepted the assessee’s contention that it was a value added reseller and the payments made by it for the purchase of software were not royalty but on account of purchases and that the assessee was not obliged to deduct tax at source on such payments. The addition/ disallowance was deleted. The Tribunal concurred with the decision of the CIT(A).

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The agreement indicated that the assessee was appointed for the purposes of reselling the software and payments made were on account of purchases made by the assessee. Payments made by a reseller for the purchase of software for sale in the Indian market could not be considered royalty.

ii) It was not disputed that in the preceding year, the Assessing Officer had accepted the transaction to be of purchase of software. The assessee was not liable to deduct tax at source. Deletion of addition was proper.”

Appellate Tribunal – Additional ground – Admissibility – Section 143(2) and 147 – A. Ys. 2005-06 to 2008-09 – The requirement of issuance of the notice u/s. 143(2) is a jurisdictional one – It does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147 is concerned – There being no fresh evidence or disputed facts sought to be brought on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise the addi

fiogf49gjkf0d
Prin. CIT vs. Silver Line; 283 CTR 148 (Del):

In an appeal before the Tribunal filed by the Assessee, the assessee raised the additional ground for the first time that since the requisite notice u/s. 143(2) was not issued before completing assessment u/s. 147 the assessment u/s. 147 has to be held to be invalid. The Tribunal allowed the ground and decided in favour of the assessee.

On appeal filed by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The legal position appears to be fairly well settled that section 292BB talks of the drawing of the presumption of service of notice on an assessee and is basically a rule of evidence. The failure of the Assessing Officer, in reassessment proceedings, to issue notice u/s. 143(2), prior to finalising the reassessment order, cannot be condoned by referring to section 292BB. Consequently the Court does not find merit in the objection of the Revenue that the assessee was precluded from raising the point concerning the nonissuance of notice u/s. 143(2) in the present case in view of the provisions of section 292BB.

ii) As regards the objection of the Revenue to the Tribunal permitting the assessee to raise the point concerning the non-issuance of notice u/s. 143(2) for the first time in the appeal before the Tribunal, the Court is of the considered view that in view of the settled legal position that the requirement of issuance of such notice u/s. 143(2) is a jurisdictional one, it does go to the root of the matter as far as the validity of the reassessment proceedings u/s. 147/148 is concerned. It raises a question of law as far as present cases are concerned since it is not in dispute that prior to finalisation of the reassessment orders, notice u/s. 143(2) was not issued by the Assessing Officer to the assessee. With there being no fresh evidence or disputed facts sought to be on record, and the issue being purely one of law, the Tribunal was not in error in permitting the assessee to raise such a point before it.”

DCIT vs. Mahanagar Gas Ltd. ITAT Mumbai `B’ Bench Before R. C. Sharma (AM) and Mahavir Singh (JM) ITA No. 1945/Mum/2013 A.Y.: 2009-10. Date of Order: 15th April, 2016 Counsel for revenue / assessee: Sanjiv Jain / A. V. Sonde & P. P. Jayaraman

fiogf49gjkf0d
Sections 40(a)(ia), 192 – Amounts paid by way of reimbursement of salary of employees, working with the assessee under a secondment agreement are not subject to TDS in assessee’s hands.

Facts
In the course of assessment proceedings, the Assessing Officer (AO) noticed from Schedule M forming part of P & L Account that the assessee had debited a sum of Rs. 193.46 lakh on account of secondment charges under the head `personnel cost’ but TDS had not been deducted on the same. He disallowed this sum u/s. 40(a)(ia) of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who, relying on the decision of the co-ordinate bench in the case of IDS Software Solutions (India) Pvt. Ltd. 122 TTJ 410 (Bang.) and also the decision of the Bombay High Court in the case of CIT vs. Kotak Securities Ltd. (ITA No. 3111 of 2009) decided the appeal in favour of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held
Upon going through the joint venture agreement entered into by the assessee with M/s GAIL and British Gas in respect of secondment charges paid by the assessee, it was observed that there was no mark up in payments made by them. Secondment agreement was entered into because the IPR rights were to remain with British Gas. The assessee also filed a letter from British Gas which clearly stated that all the taxes due in India of the employees seconded to the assessee have been deducted from salary paid to secondees and paid to the Government of India

The Tribunal observed that the issue is covered by the decision of ITAT Bangalore Bench in the case of IDS Software Solutions (India) (P.) Ltd. vs. ITO (supra). Following the ratio of the said decision, the Tribunal dismissed the appeal filed by the revenue.

The appeal filed by the Revenue was dismissed.

Gurpreet Kaur vs. ITO ITAT Amritsar Bench (SMC) Before A. D. Jain (JM) ITA No. 87/Asr/2016 A.Y.: 2011-12. Date of Order: 24th March, 2016 Counsel for assessee / revenue : J. S. Bhasin / Tarsem Lal

fiogf49gjkf0d
Section 143(3), CBDT Instruction dated 8.9.2010 – As per CBDT instruction dated 8.9.2010, if a case is selected for scrutiny on the basis of AIR information then the scope of scrutiny is to be limited to verification of the said AIR information. AO is not entitled to widen the scope of scrutiny without approval of the CIT. Order passed by the AO in violation of the specific CBDT instruction is not legally sustainable.

Facts
The assessee filed his return of income on 17.10.2011. The Assessing Officer (AO) issued a notice dated 21.9.2012 seeking information in connection with return of income submitted by the assessee. This notice was marked “AIR Only”. Thereafter, the AO issued a notice, dated 15.7.2013, u/s. 142(1) of the Act, asking the assessee to produce accounts/or documents and information as per questionnaire to the said notice. The questionnaire called for details on various issues apart from the information of cash deposits made by the assessee in his savings bank account. The assessee, in his reply, stated that the notice was seeking information with evidence on various issues not covered by AIR information, though the first notice was marked “AIR Only” and that in accordance with instruction dated 8.9.2010 issued by CBDT scrutiny of cases selected on the basis of information received through the AIR returns would be limited only to aspects of information received through AIR.

In response to the query regarding the source of alleged cash deposit of Rs. 25 lakh in the assessee’s savings bank account with OBC, the assessee stated that she sold her residential house for Rs.32.25 lakh of which Rs. 25 lakh were received by cash which cash was deposited by her into her savings bank account. To substantiate her contention, copy of the sale deed was filed.

The AO noticed that the assessee had received a sum of Rs. 3,00,000 from Smt. Balbir Kaur under agreement dated 15.3.2009 entered into by the assessee with Smt. Balbir Kaur for sale of assessee’s property. Copy of the agreement was filed. He called upon the assessee to produce Smt. Balbir Kaur for his examination. Since the assessee had subsequently on 7.5.2010 sold this property to a different person, but had not refunded the amount received from Balbir Kaur to her, the AO added this sum of Rs. 3,00,000 as income of the assessee on the ground that it was forfeited by the assessee. He also denied exemption claimed by the assessee under section 54 of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who upheld the order of the AO.

Aggrieved, by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that in the present case, the question is, whether while computing capital gain and denying benefit of section 54 to the assessee, the AO has contravened CBDT’s Instruction no. F.No. 225/26/2006- ITA –II(Pt.) dated 8.9.2010 thereby rendering the assessment order invalid. It was observed that the Delhi Bench of ITAT has in the case of Crystal Phosphates Ltd. vs. ACIT 34 CCH 136 (Del. Trib.) held that once CBDT has issued instructions, the same have to be followed in letter and spirit by the AO. It also noted that the Calcutta High Court has in the case of Amal Kumar Ghosh vs. Addl. CIT 361 ITR 458 (Cal.), held that when the department has set down a standard for itself, the department is bound by that standard and it cannot act with discrimination. It also noted that the operative word in section 119(1) is `shall’. It observed that in the present case, the assessee’s case was picked up for scrutiny on the basis of AIR information and the notice was stamped “AIR Only” in compliance with para 3 of the CBDT instruction dated 8.9.2010. The AIR information in the present case was regarding cash deposit of Rs. 25 lakh by assessee in her savings bank account with OBC. The assessee explained the same as sale proceeds of her residential house. This assertion of the assessee was supported by a copy of the sale deed. As per CBDT instruction, nothing further was to be gone into by the AO since the information received through AIR was the cash deposits. The act of the AO of asking the assessee to produce Smt. Balbir Kaur for examination to ascertain whether the agreement was finalised or cancelled was not covered by AIR information and therefore, was not within the purview of the AO. This act of the AO amounted to widening the scope of scrutiny, which as per para 2 of the CBDT instruction, could have been done with the approval of the administrative Commissioner. Since this approval was not taken, the Tribunal held that the action of the AO was violative of the CBDT instruction and therefore the order passed by the AO in violation of specific CBDT instruction was not legally sustainable.

The Tribunal allowed the appeal filed by the assessee.

[2015] 154 ITD 768 (Mumbai) ITO vs. Structmast Relator (Mumbai) (P.) Ltd. A.Y.: 2009-10 Date of Order: 25th March, 2015.

fiogf49gjkf0d
Section 24(b) of the Income-tax Act, 1961 – The interest bearing security deposits partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.

FACTS
During the year under consideration, the assessee, who was engaged in the business of builders and developers, had taken an interest-free loan of Rs. 11 crore from ‘R’ for a short period to purchase an immovable property which was then let out to various tenants. The assessee received deposits from them whereon it had to pay interest at the rate of 6% p.a. These deposits were utilised for the repayment of loan taken from the ‘R’. The assessee claimed deduction of interest u/s. 24(b).

The A.O. disallowed the deduction u/s. 24(b) on the grounds that interest should be payable on capital borrowed or the capital borrowed must be for the purpose of repayment of old loan. He held that the security deposits cannot be termed as capital borrowed for the purpose of repayment of old loan.

CIT(A) holding in favour of assessee stated that such deposits were in fact a kind of loan only, as they bore interest and were utilised for the purpose of repayment of original loan taken for the purchase of house property.

On Revenue’s Appeal-

HELD
It is an undisputed fact that interest at 6% is payable on these refundable deposits under consideration which were taken to repay the original loan. The controversy is whether these deposits can be considered as borrowed money and accordingly whether interest on the same should be allowed u/s 24(b) to the assessee or not.

The word ‘borrow’ as defined in Law Lexicon (2nd edition) means to take or receiving from another person as a loan or on trust money or other article of value with the intention of returning or giving an equivalent for the same. A person can borrow on a negotiated interest with or without security. If the deposits are interest bearing and are to be refunded, then a debt is created on the assessee which it is liable to be discharged in future.

If the deposits had been security deposit simplicitor to cover the damage of the property or lapses on part of the tenant either for non-payment of rent or other charges, then such a deposit cannot be equated with the borrowed money, because then there is no debt on the assessee. However in the given case, it is clear that the intention of taking the deposit is not so.

It was held in favour of the assessee that the moment the security put is accepted on interest, it partakes the character of borrowed money and the assessee is eligible to claim deduction u/s. 24(b) of the interest paid on the same.

[2015] 154 ITD 803 (Chennai) DCIT vs. Ganapathy Media (P.) Ltd. A.Y.: 2009-10 Date of Order: 19th June 2015

fiogf49gjkf0d
Section 194J of the Income-tax Act, 1961 – The transaction of
acquiring the right to telecast a cinematographic film through satellite
for a period of 99 years is in the nature of purchase of
cinematographic film and not fees paid for technical services and
therefore is not liable to TDS.

FACTS
The assessee
company was in the business of buying and selling rights of the feature
films as a trader for consideration. During the year under
consideration, it was granted rights to telecast films through satellite
for a period of 99 years. The transaction was observed by the AO to be
in the nature of fees paid for technical services and therefore he
disallowed the payment u/s. 40(a)(ia) on the grounds that no TDS u/s.
194J was deducted on the same. The CIT(A) held the transaction to be in
the nature of purchase of cinematographic film by the assessee and
therefore deleted the disallowance made by the AO.

On revenue’s appeal –

HELD
The
issue before the Tribunal was whether the right to telecast the
cinematographic film through satellite is a mere assignment of right or
it is a purchase of the feature film.

The assessee claimed that
it amounted to purchase of films since the satellite right was given to
the assessee for 99 years. However, the Revenue claimed that it is only
an assignment, therefore, the assessee had to deduct tax u/s. 194J of
the Act.

The Tribunal relied on the decision of the Madras High
Court in K. Bhagyalakshmi vs. Dy. CIT [2014] 221 Taxman 225 wherein it
was held the copyright subsists only for a period of 60 years.
Therefore, the right given to the assessee beyond the period of 60 years
has to be treated as sale of the right for cinematographic film. The
order of CIT(A) was upheld and the issue was decided in favour of the
assessee.

Appeal to High Court – Finding of fact arrived at by the Tribunal cannot be set aside without a specific question regarding a perverse finding of fact having been raised before the High Court. Business Expenditure – Legal expenses incurred after the take over of a partnership firm is allowable as a deduction u/s. 37. Depreciation – Plant includes intellectual property rights.

fiogf49gjkf0d
Mangalore Ganesh Beedi Works v. CIT [2015] 378 ITR 640 (SC)

In 1939, the late Sri S. Raghuram Prabhu started the business of manufacturing beedis. He was later joined the business by Sri Madhav Shenoy as a partner and thus M/s. Mangalore Ganesh Beedi Works (for short “MGBW”) came into existence with effect from February 28, 1940.

The partnership firm was constituted from time to time and its last constitution and partnership deed contained clause 16 relating to the manner in which the affairs of the partnership firm were to be wound up after its dissolution. Clause 16 of the partnership deed reads as follows:

“16. If the partnership is dissolved, the going concern carried on under the name of the firm Mangalore Ganesh Beedi Works and all the trade marks used in course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the partner who offers and pays or two or more partners who jointly offer and pay the highest price therefore as a single group at a sale to be then held as among the partners shall be entitled to bid. The other partners shall execute and complete in favour of the purchasing partner or partners at his/her or their expense all such deed, instruments and applications and otherwise and him/her name or their names of all the said trade marks and do all such deed, acts and transactions as are incidental or necessary to the said transferee or assignee partner or partners.”

Due to differences between the partners of MGBW, the firm was dissolved on or about December 6, 1987, when the two partners of the firm applied for its winding up by filing Company Petition No.1 of 1988 in the High Court. While entertaining the Company Petition the High Court appointed an official liquidator and eventually, after hearing all the concerned parties, a winding up order was passed on June 14, 1991.

In its order passed on June 14, 1991, the High Court held that the firm is dissolved with effect from December 6, 1987, and directed the sale of its assets as a going concern to the highest bidder amongst the partners.

Pursuant to the order passed by the High Court on June 14, 1991, an auction was conducted in which three of the erstwhile partners forming an association of persons (hereinafter referred to as “AOP-3”) emerged as the highest bidders and their bid of Rs.92 crores for the assets of MGBW was accepted by the official liquidator on or about November 17, 1994. With effect from November 18, 1994, the business of the firm passed on into the hands of AOP-3 but the tangible assets were actually handed over by the official liquidator to AOP-3 on or about January 7, 1995.

MGBW (hereinafter referred to as “the assessee”) filed its return for the assessment year 1995-96 relating to period November 18, 1994, to March 31, 1995, and, subsequently, filed a revised return. Broadly, the assessee claimed a deduction of Rs.12,24,700 as a revenue expenditure permissible u/s. 37 of the Incometax Act, 1961 (hereinafter referred to as “the Act”) towards legal expenses incurred. The assessee also claimed deduction u/ss.35A and section 35AB of the Act towards acquisition of intellectual property rights such as rights over the trade mark, copyright and technical know-how. In the alternative, the assessee claimed depreciation on capitalizing the value of the intellectual property rights by treating them as plant.

The Assessing Officer passed an order on March 30, 1998, rejecting the claim of the assessee under all the three sections mentioned above. Feeling aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who passed an order on October 15, 1998. The appeal was allowed in part inasmuch as it was held that the assessee was entitled to a deduction towards legal expenses. However, the claim of the assessee regarding deduction or depreciation on the intellectual property rights was rejected by the Commissioner of Income-tax(Appeals).

As a result of the appellate order, the Revenue was aggrieved by the deduction granted to the assessee in respect of legal expenses and so it preferred an appeal before the Tribunal. The assessee was aggrieved by the rejection of its claim in respect of the intellectual property rights and also filed an appeal before the Tribunal.

By an order dated October 19, 2000, the Tribunal allowed the appeal of the assessee while rejecting the appeal of the Revenue.

The High Court set aside the findings of the Income-tax Appellate Tribunal (for short “the Tribunal”) and restored the order of the Assessing Officer.

The Supreme Court with regards to the claim of deduction of Rs.12,24,700/- as revenue expenditure held that there was a clear finding of fact by the Tribunal that the legal expenses incurred by the assessee were for protecting its business and that the expenses were incurred after November 18, 1994. According to the Supreme Court there was no reason to reverse this finding of fact particularly since nothing had been shown to them to conclude that the finding of fact was perverse in any manner whatsoever. That apart, if the finding of fact arrived at by the Tribunal were to be set aside, a specific question regarding a perverse finding of fact ought to have been framed by the High Court.

The Supreme Court therefore set aside the conclusion arrived at by the High Court on this question and restored the view of the Tribunal.

In so far as the question of granting depreciation on the value of trade marks, copy rights and know how was concerned, the Supreme Court noted that the fundamental basis on which these questions were decided against the assessee and in favour of the Revenue was the finding of the High Court that what was sold by way of auction to the highest bidder was the goodwill of the partnership firm and not the trade marks, copyrights and technical know-how.

According to learned counsel for the Revenue, MGBW was already the owner of the trade marks, copyrights and technical know-how and essentially the rights in the intellectual property might be included in goodwill, but these were not auctioned off but were relinquished in favour of AOP-3.

The Supreme Court observed that the trade marks were given a value since in the beedi industry the trade mark and brand name have a value and the assessee’s product under trade mark “501” had a national and international market. As far as the copyright valuation was concerned, beedis were known not only by the trade mark but also by the depiction on the labels and wrappers and colour combination on the package. The assessee had a copyright on the content of the labels, wrappers and the colour combination on them. Similarly, the know-how had a value since the aroma of beedis differ from one manufacturer to another, depending on the secret formula for mixing and blending tobacco.

The Supreme Court noted that AOP-3 had obtained a separate valuation from the chartered accountant M. R. Ramachandra Variar. In his report dated September 12, 1994, the technical know-how was valued at Rs.36 crore, copyright was valued at Rs.21.6 crore and trade marks were valued at Rs.14.4 crore making a total of Rs.72 crore.

The Supreme Court noted that in the case of M. Ramnath Shenoy (an erstwhile partner of MGBW) the Tribunal had accepted (after a detailed discussion) the contention of the assessee that trade marks, copyrights and technical know-how alone were comprised in the assets of the business and not goodwill. It was also held that when the Revenue alleges that it is goodwill and not trade marks, etc., that is transferred the onus will be on the Revenue to prove it, which it was unable to do. The Tribunal then examined the question whether the sale of these intangible assets would attract capital gains. The question was answered in the negative and it was held that the assets were self-generated and would not attract capital gains. The decision of the Tribunal was accepted by the Revenue and therefore according to the Supreme Court there was no reason why a different conclusion should be arrived at in so far as the assessee was concerned.

The Supreme Court observed that the High Court denied any benefit to the assessee u/ss 35A and 35AB of the Act since it was held that what was auctioned off was only goodwill and no amount was spent by AOP-3 towards acquisition of trade marks, copyrights and know-how. In coming to this conclusion, reliance was placed in the report of the chartered accountants Rao and Swamy who stated that the assets of MGBW were those of a going concern and were valued on the goodwill of the firm and no trade marks, copyrights and know-how were acquired. According to the Supreme Court, the High Court rather speculatively held that the valuation made by the chartered accountant of AOP-3 that is M. R. Ramachandra Variar that the goodwill was split into know-how, copyrights and trade marks only for the purposes of claiming a deduction u/ss 35A and 35AB of the Act and the value of the goodwill was shown as nil and the deduction claimed did not represent the value of the know-how, copyrights and trade marks.

The Supreme Court however left open the question of the applicability of sections 35A and 35AB of the Act for an appropriate case. This was because learned counsel submitted that if the assessee was given the benefit of section 32 read with section 43(3) of the Act (depreciation on plant) as had been done by the Tribunal, the assessee would be quite satisfied. The Supreme Court observed that unfortunately, this alternative aspect of the assessee’s case was not looked into by the High Court. Therefore, according to the Supreme Court now the question to be answered was whether the assessee was entitled to any benefit u/s. 32 of the Act read with section 43(3) thereof for the expenditure incurred on the acquisition of trade marks, copyrights and know-how.

The Supreme Court noted that the definition of “plant” in section 43(3) of the Act was inclusive. A similar definition occurring in section 10(5) of the Income-tax Act, 1922 was considered in CIT vs. Taj Mahal Hotel wherein it was held that the word “plant” must be given a wide meaning. The Supreme Court held that for the purposes of a large business, control over intellectual property rights such as brand name, trade mark, etc., are absolutely necessary. Moreover, the acquisition of such rights and know-how is acquisition of a capital nature, more particularly in the case of the assessee. Therefore, it could not be doubted that so far as the assessee was concerned, the trade marks, copyrights and know-how acquired by it would come within the definition of “plant” being commercially necessary and essential as understood by those dealing with direct taxes. The Supreme Court noted that section 32, as it stood at the relevant time did not make any distinction between tangible and intangible assets for the purposes of depreciation.

In this context, the Supreme Court observed that by denying that the trade marks were auctioned to the highest bidder, the Revenue is actually seeking to re-write clause 16 of the agreement between the erstwhile partners of MGBW. This clause specifically states that the going concern and all the trademarks used in the course of the said business by the said firm and under which the business of the partnership is carried on shall vest in and belong to the highest bidder. Under the circumstances, it was difficult to appreciate how it could be concluded by the Revenue that the trade marks were not auctioned off and only the goodwill in the erstwhile firm was auctioned off. The Supreme Court restored the order of the Tribunal directing the Assessing Officer to capitalise the value of trade marks, copyrights and technical know-how by treating the same as plant and machinery and to grant depreciation thereon.

Recovery of Tax – Stay of Demand – Subsequent events should be taken into consideration.

fiogf49gjkf0d
Sidhi Vinayak Metcom Ltd. vs. UOI [2015] 378 ITR 372 (SC)

The assessment in respect of the assessment years 2010-11 and 2011-12 was reopened by the Income-tax Department by issuing notice u/s. 148. Assessments for these years were carried out afresh by the Assessing Officer imposing an additional tax demand of Rs.64 lakhs. The Petitioner had filed appeals against the said order which were pending before the Commissioner of Income-tax (Appeals). The Petitioner also moved an application for stay of the demand. On this, application, the Commissioner of Income-tax (Appeals) passed orders granting stay of interest and in respect of the tax amount, the petitioner was permitted to deposit the same in 16 installments. However, the Petitioner committed default in making payment of the very first installment because of which the bank account of the Petitioner was attached. The order was challenged by filing a writ petition in the High Court which was dismissed.

Before the Supreme Court it was pointed out that up to now the Petitioner had paid a sum of Rs.27.7 lakh in all. It was also pointed out by the learned counsel for the Petitioner that the main reason for reopening of the assessment for the aforesaid years by issuance of notice u/s. 148 was certain proceedings under the Central Excise Act. A copy of the decision dated September 16, 2015, paused by the Customs, Excise and Service Tax Appellate Tribunal was filed before the Supreme Court by way of additional document, revealing that in appeal against the Order-in- Original of the Excise Department, the CESTAT had set aside the said order and remitted the case back to the adjudicating authority for fresh adjudication.

According to the Supreme Court, in view of the aforesaid subsequent event, it would be appropriate if the petitioner approached the Commissioner of Income-tax (Appeals) once again with an application for stay bringing the aforesaid events to the notice of the Commissioner of Income-tax (Appeals). The Supreme Court was confidant that the Commissioner of Income-tax (Appeals) would consider the application on its own merits and pass orders thereon within a period of four weeks from the date of filing the application. The Supreme Court disposed the special leave petition accordingly.

TDS – Payment to non-resident – Sections 195 and 201 – A. Y. 2002-03 – Transaction not resulting in liability to tax – Tax not deductible at source – Assessee not in default

fiogf49gjkf0d

Anusha Investments Ltd. vs. ITO; 378 ITR 621 (Mad):

The assessee had purchased shares from a non-resident company which had resulted in capital loss to the nonresident company. Therefore, the assessee had not deducted tax at source. The Tribunal held that whether or not the non-resident company suffered a loss or gain on the sale of shares, a duty was cast on the assessee to deduct the tax whenever it made payment to the nonresident and that the assessee was not only liable to deduct the tax at source, but it also had to pay the tax so collected to the exchequer.

In appeal by the assessee, the Madras High Court reversed the decision of the Tribunal and held as under:

“In the present transaction, admittedly, there was no liability to tax. As a result, the question of deducting tax at source and the assessee violating the provisions of section 195 did not arise and, therefore, the assessee could not be treated as an assessee in default.”

Revision – Section 263 – A. Y. 2007-08 – Question whether total income for purposes of section 36(1)(viia)(c) should be computed after allowing deduction u/s. 36(1)(viii) – Two possible views – Debatable issue – Revision u/s. 263 not justified

fiogf49gjkf0d

CIT vs. Power Finance Corporation Ltd.; 378 ITR 619 (Del):

For the A. Y. 2007-08, the Assessing Officer completed the assessment u/s. 143(3), allowing the deduction u/s. 36(1)(viia)(c) and u/s. 36(1)(viii). The Commissioner exercised the revisional powers u/s. 263 and held that the deduction u/s. 36(1)(viia)(c) should have been computed after allowing deduction u/s. 36(1)(viii). The Tribunal set aside the order of the Commissioner holding that on the question whether the total income for the purpose of section 36(1)(vii)(c) should be computed after allowing the deduction u/s. 36(1)(viii) there were at least two possible views as reflected in the orders of the Delhi and Chennai Benches of the Tribunal. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) I ndependent of the two decisions, the stand of the Revenue as set out in its memorandum of appeal and that of the assessee that both deductions were independent of each other, gave rise to two further possible interpretations.

ii) The view taken by the Assessing Officer was a possible one and there was no occasion for the Commissioner to have exercised the jurisdiction u/s. 263.”

Presumptive tax – Section 44BBA – A. Y. 1989-90 to 1993-94 – Non-residents – Business of operation of air craft – Section 44BBA is not charging provision, but only a machinery provision – It cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income – When there is no taxable income, section 44BBA cannot be applied to bring to tax presumptive income constituting 5 per cent of gross receipts

fiogf49gjkf0d
DIT vs. Royal Jordanian Airlines; [2015] 64 taxmann.com 93 (Delhi):

The assessee-airline was established by the Ministry of Transport of the Kingdom of Jardon. It appointed Jet Air Pvt. Ltd. as its general sales agency in India. The assessee commenced its operations in India, carrying passengers and cargo on international flights from and to India from 1989 onwards. Since commencement of operations in India, assessee had been incurring losses. For relevant years, the assessee filed its return declaring nil income. The Assessing Officer opined that assessee was a foreign company and was liable to pay tax in India in terms of section 44BBA. He thus proceeded to determine income at the rate of 5 per cent of the net sales. The Tribunal upheld the order of Assessing Officer on merits. However, the Tribunal remanded the matter back for recomputation of income u/s. 44BBA.

The Delhi High Court allowed the assessee’s appeal and held as under:

“i) Inasmuch as section 44BBA is not charging provision, but only a machinery provision, it cannot preclude an assessee from producing books of account to show that in any particular assessment year there is no taxable income.

ii) Where there is no income, section 44BBA cannot be applied to bring to tax the presumptive income constituting 5 per cent of the gross receipts in terms of section 44BBA(2). No doubt, for that purpose the assessee has to produce books of account to substantiate that it has incurred losses or that its assessable income is less than its presumptive income, as the case may be.

iii) The Tribunal has noted the factual position regarding the losses incurred by assessee for the relevant years. This has not been disputed by the revenue in its appeal against the aforesaid order. Consequently, the question of assessee being asked to pay tax on presumptive basis u/s. 44BBA for the said year, or the matters being sent to the Assessing Officer for verifying the said facts does not arise.

In the result, assessee’s appeal has to be allowed.”

Uday K. Pradhan vs. Income Tax Officer ITAT “F” Bench, Mumbai Before Jason P. Boaz (AM) and Sandeep Gosain (JM) ITA No. 4669/Mum/2014 A.Y.: 2005-06. Date of Order: 6th April, 2016 Counsel for assessee / revenue: Dharmesh Shah / Sandeep Goel

fiogf49gjkf0d
Section 2(22)(d): Redemption of preference shares does not constitute “deemed dividend”

Facts
The assessee was a partner in a firm which was converted into a company. As per the books of the erstwhile firm, the assessee had a credit balance of Rs. 38.74 lakh and in lieu of the said credit balance, the assessee received two lakh equity shares and 2,07,417 redeemable preference shares. In the year under appeal, the said redeemable preference shares were redeemed at par and the assessee received Rs. 20.74 lakh. The AO was of the view that the assessee’s receipt of the sum of Rs. 20.74 lakh on redemption of preference shares resulted in reduction of the share capital and therefore, invoked the provisions of section 2(22)(d) of the Act to bring the same to tax as deemed dividend. On appeal, the CIT(A) was of the view that this was a colourable device for distribution of accumulated profits without any payment by the assessee and which benefitted the assessee/shareholder to the tune of Rs. 20.74 lakh therefore it was exigible to tax u/s. 2(22)(d).

Held
Based on the records, the Tribunal noted it was evident that the assessee received the 2,07,417 redeemable preference shares in lieu of his credit balance in capital account of Rs. 38.74 lakh in the erstwhile firm which had since been corporatised. Thus, the assessee was allotted the redeemable preference shares for valuable consideration and that there was no distribution of accumulated profits by the company to its shareholders on redemption of preference shares, which could result in reduction of share capital. Therefore the Tribunal held that the provisions of section 2(22) (d) of the Act would not apply. The Tribunal noted that even as per section 80(3) of the Companies Act, 1956, the redemption of preference shares is not considered as reduction of share capital. Therefore, according to the Tribunal, treating the redemption of preference shares as deemed dividend u/s. 2(22) (d) of the Act does not arise, as it can be treated so only when there is distribution of accumulated profits by way of reduction of share capital.

In coming to this finding the Tribunal relied on the decision of the Coordinate Bench in the case of Parle Biscuits Pvt. Ltd. In ITA Nos. 5318 & 5319/Mum/2008 and 447/ Mum/2009 dated 19.08.2001.

[2016] 156 ITD 770 (Mumbai ) GSB Capital Markets Ltd. vs. DCIT A.Y.: 2010-11 Date of Order: 16th December, 2015

fiogf49gjkf0d
Section 74 – Even though loss arising from transfer of short-term capital assets (on which STT is paid) is assessed at 15% tax rate, the said loss can be brought forward and set off against the long term capital gains which are assessed at 20% tax rate.

Facts
The assessee-company was a member of the Bombay Stock Exchange and engaged in the business of share broking, trading and dealing in shares and securities

The assessee had claimed set-off of brought forward short term capital loss against the long term capital gains during the relevant assessment year.

The AO opined that loss arising from transfer of shortterm capital assets (on which STT is paid) was assessed at 15 per cent tax rate while the long-term capital gain was assessed at 20 per cent tax rate and hence it could not be set-off in view of section 70(3).

The CIT(A) upheld the order of AO.

On appeal before Tribunal.

Held
Section 70 deals with the set-off of losses from one source against the income from another source under the same head of income and deals with intra-head adjustment of losses during the same assessment year under the different heads of income.

On the other hand, section 74 which deals with the carry forward of capital losses and set-off against the income of the subsequent financial year, clearly stipulates that loss arising from transfer of short-term capital asset which is brought forward from earlier years, can be set-off against the capital gain assessable for subsequent assessment year, in respect of any other capital asset which could be either long-term capital gain or short-term capital gain.

Circular no. 8 of 2002, dated 27-08-2002 issued by CBDT explains the amendment made by the Finance Act, 2002 as follows:

“Since long-term capital gains are subject to lower incidence of tax, the Finance Act, 2002 has rectified the anomaly by amending the sections to provide that while losses from transfer of short-term capital assets can be set-off against any capital gains, whether short-term or long-term, losses arising from transfer of long-term capital assets, will be allowed to be set-off only against long-term capital gains. It is further provided that a long term capital loss shall be carried forward separately for eight years to be set-off only against long-term capital gains. However, a short-term capital loss, may be carried forward and setoff against any income under the head Capital gains”.

Thus, in view of our above discussions and reasoning, it was held that the assessee had rightly claimed set-off of brought forward short term capital loss against the long term capital gains during the relevant assessment year.

In result, the appeal filed by the assessee-company was allowed and the orders of CIT-(A) and AO were set aside.

[2016] 156 ITD 793 (Kolkata ) Manoj Murarka vs. ACIT A.Y.: 2007-08 Date of order: 20th November, 2015

fiogf49gjkf0d
Section 2(22)(e) – For the purposes of artificial categories of dividends u/s. 2(22), accumulated profits do not include any exempt capital gains. Thus, where assessee has negative accumulated profits excluding exempt capital gains, provisions of deemed dividend cannot be invoked in respect of any amount overdrawn by the assessee.

Facts
During the relevant assessment year, the assessee, his son and daughter had overdrawn certain amount from a company in which the assessee was a substantial shareholder holding 41% of shares. The son and daughter were not shareholders in the company.

The AO treated the aforesaid amount overdrawn by the assessee and his son and daughter from the company as deemed dividend u/s. 2(22)(e) and added the same in the income of the assessee.

The CIT(A) held that the deemed dividend could be taxed only in the hands of shareholder holding more than 10% voting power in the company from which monies are drawn. He therefore deleted the addition made towards deemed dividend in respect of the amount overdrawn by the son and daughter, as they were not shareholders of company.

However, he confirmed the addition made towards deemed dividend in respect of the amount overdrawn by the assessee by ignoring assessee’s contention that there was only negative accumulated profits, if the tax exempt long term capital gain was excluded from accumulated profits.

On cross appeals to the Tribunal:

Held
In respect of amount overdrawn by son and daughter
Both the son and daughter of the assessee are not shareholders in the lending company. The deemed dividend, if any, could be assessed only in the hands of the shareholders and not otherwise. This argument was taken by the assessee even before the lower authorities and the revenue has not brought on record any contrary evidence to this fact. Hence, the provisions of section 2(22)(e) could not be invoked in respect of amount overdrawn by the son and daughter.

In respect of amount overdrawn by assessee
The legal fiction created in the Explanation 2 to section 2(22) states that ‘accumulated profits’ shall include all profits of the company up to the date of distribution or payment. For reckoning the said accumulated profits, apart from the opening balance of accumulated profits, only the profits earned in the current year are to be added and then the total accumulated profits should be considered for the purpose of calculation of dividend out of accumulated profits, if any. The said Explanation nowhere contemplates to bring within the ambit of expression ‘accumulated profits’ any capital profits which are not liable to capital gains tax.

In the instant case, the capital gains derived by the company are tax exempt and hence, the same should not be included in accumulated profits and if the said gains are excluded, then there are only negative accumulated profits available with the company.

In the absence of accumulated profits, there is no scope for making any addition towards deemed dividend u/s. 2(22)(e).

Accordingly, the ground raised by the assessee is allowed and appeal of the revenue is dismissed.

Note: Reliance was placed on CIT vs. Mangesh J. Sanzgiri [1979] 119 ITR 962 (Bom. HC) and ACIT vs. Gautam Sarabhai Trust No. 23 [2002] 81 ITD 677 (Ahd. Trib).

[2016] 177 TTJ 18 (Chandigarh) H. P. State Electricity Board vs. Addl. CIT A.Y.s.: 2007-08 to 2010-11 Date of Order : 10th December, 2015

fiogf49gjkf0d
Section 271C – Penalty u/s. 271C is not leviable on an assessee who is not treated as an “assessee-in-default” as per section 201 of the Act more so when there was a reasonable cause for not deducting tax on payment made by the assessee.

Facts
The assessee company was engaged in generation, transmission and distribution of power in the State of Himachal Pradesh. It purchased/sold power from PGCIL and was also selling power to consumers. Power was transmitted through transmission network of PGCIL and assessee made payments on account of wheeling charges, SLDC, transmission charges to PGCIL. In respect of payments made by the assessee to PGCIL, during the financial years 2006-07 to 2009-10, the assessee company was liable to deduct tax at source, but did not deduct tax at source.

Since PGCIL was found to have paid taxes on its income received from the assessee, the assessee was not treated as an assessee-in-default u/s. 201 of the Act. However, the AO levied penalty u/s. 271C of the Act amounting to Rs.1,36,00,187; Rs., 2,48,13,453; Rs.2,76,67,625 and Rs.5,71,017 for the financial years 2006-07, 2007-08, 2008-09 and 2009-10 respectively. He held that there was no reasonable cause for the deductor assessee not to deduct tax at source. Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal, having noted the provisions of section 271C of the Act and also the ratio of the decision of the Karnataka High Court in the case of Remco (BHEL) House Building Co-operative Society Ltd. vs. ITO (2015) 273 CTR 57 (Kar), and observed that the assessee has not been treated as “assessee in default” as per section 201 of the Act, and is therefore neither liable to deduct nor pay any tax as per Chapter XVII-B. It held that in such circumstances, the question of levy of penalty u/s. 271C does not arise. It observed that this view has been upheld by the Hyderabad Bench of the Tribunal, in the case of ACIT vs. Good Health Plan Ltd. in ITA No. 155/Hyd/2013, wherein penalty levied u/s. 271C was deleted, since the assessee was not held to be an assessee in default. The Tribunal held that no penalty u/s. 271C could be levied in the case of the assessee.

The Tribunal also observed, that the fact that the tax on impugned sums had been reimbursed to PGCIL had not been controverted by the Revenue. It held that in such circumstances, the belief harboured by the assessee that by deducting further TDS, it would tantamount to double taxation, appears to be a reasonable and bonafide belief. It considered the explanation of the term “reasonable cause” as explained by the Delhi High Court in the case of Woodward Governor India (P.) Ltd. vs. CIT (2001) 168 CTR 394 (Del), and held that there is no merit in the contention of the Department Representative (DR) that the assessee did not have reasonable cause for not deducting tax at source.

The Tribunal held that the assessee not being in default in respect of the amount of tax itself, there cannot be any levy of penalty u/s. 271C, and more so, where there was a reasonable cause for not deducting the TDS on the payment made.

This ground of appeals filed by the assessee was allowed.

2016-TIOL-547-ITAT-DEL Hindustan Plywood Company vs. ITO A.Y.: 2009-10 Date of Order: 19th February, 2016

fiogf49gjkf0d
Section 40(a)(ia) – Section 40(a)(ia) inserted w.e.f. 1.4.2013 is curative in nature and has retrospective effect.
Section 40(b)(v) – Profit on sale of godown credited to profit & loss account by the assessee is not to be excluded for computing remuneration allowable to partners.

Facts – I
The Assessing Officer (AO) in the course of assessment proceedings, noticed that the assessee had not deducted tax at source on interest amounting to Rs. 2,52,043 paid to various depositors and also on Rs. 1,44,000 paid towards car hire charges. He disallowed both these expenses u/s. 40(a)(ia) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that the second proviso is curative in nature, intended to supply an obvious omission, take care of unintended consequence and make the section workable and is therefore retrospective.

Held – I
The Tribunal noted that the contention made on behalf of the assessee is supported by the decision of the ITAT , Kolkata Bench in the case of Santosh Kumar Kedia vs. ITO in ITA No. 1905/Kol/2014 for AY 2007-08; order dated 4.3.2015. It observed that the Delhi High Court in the case of CIT vs. Ansal Landmark Township Pvt. Ltd. (377 ITR 635) has also taken the similar view. The Tribunal restored this issue to the file of the AO, with the direction that the assessee shall provide all details to the AO with regard to the recipients of the income and taxes paid by them. The AO shall carry out necessary verification in respect of the payments and taxes of such income and also filing the return by the recipient. In case, the AO finds that the recipient has duly paid the taxes on the income, the addition made by the AO shall stand deleted.

This ground of appeal filed by the assessee was allowed.

Facts – II
The assessee had credited Rs. 10,20,430 to its Profit & Loss Account being profit on sale of godown on which it had been claiming depreciation from year to year. The AO was of the view that salary paid to partners is not to be paid on these profits. He excluded profit on sale of godown for the purposes of computation of remuneration to partners. Accordingly, he recomputed the partners remuneration and disallowed Rs. 3,60,540 out of Rs. 5,40,000 claimed by the assessee as salary paid to the partners.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.

Held – II
The Tribunal considered the provisions of section 40(b)(v) which lay down the maximum quantum of remuneration payable to partners and also Explanation 3 thereto which defines “book profit”. It held that from the Explanation 3, it is apparent that the book profit has to be the profit as has been shown in the profit & loss account for the relevant previous year. It observed that the profit received by the assessee on sale of godown amounting to Rs. 10,20,430 was credited to Profit & Loss Account as prepared by the assesse and was part of net profit as shown in profit & loss account. Both the authorities below did not appreciate the provisions of section 40(b)(v), Explanation 3 and misinterpreted definition of “book profit” as given under Explanation 3 to section 40(b) of the Act. It observed that this view is supported by the decision of the Calcutta High Court in the case of Md. Serajuddin & Brothers vs. CIT (2012 – TIOL- 593- HC – CAL) as well as the following decisions –

i) Suresh A. Shroff & Co. (Mum) (2013) 140 ITD 1;

ii) CIT v. J. J. Industries – (2013)(Guj.) 216 Taxman 162;

iii) S. P. Equipment & Services vs. ACIT – (Jaipur)(2010) 36 SOT 325;

iv) ITO vs. Jamnadas Muljibhai – 99 TTJ 197 (Rajkot);

v) Deepa Agro Agencies vs. ITO – 154 Taxman 80 (Bang. Trib.);

vi) Allen Career Institution vs. Addl CIT – (2010) 37 DTR 379 (Jp)(Trib.);

vii) ACIT vs. Bilawala & Co. – 133 TTJ 168 (Mum.)(Trib.)

The Tribunal allowed this ground of appeal filed by the assessee.

[2016] 177 TTJ 1 (Mumbai.) Crompton Greaves Ltd. vs. CIT A.Y.: 2007-08 Date of Order: 1st February, 2016

fiogf49gjkf0d
Sections 246A(1)(a), 253(1) – An appeal against order passed u/s.
143(3) r.w.s. 263 lies with CIT(A) u/s. 246A(1)(a) being an order passed
by AO u/s. 143(3). Order passed u/s. 143(3) r.w.s. 263 does not find
place in section 253(1).

Facts
The assessment of total
income of the assessee company was completed by the Assessing Officer
(AO) vide his order dated 28th December, 2010 passed u/s. 143(3) of the
Act. Subsequently, the AO passed an order, dated 24th February, 2014, to
give effect to an order dated 6th February, 2013 passed u/s. 263 of the
Act.

Aggrieved by the additions made in the order dated 6th
February, 2013 passed u/s. 143(3) r.w.s. 263 of the Act, the assessee
preferred an appeal to the Tribunal.

Held
The
Tribunal observed that the assessee company has preferred a first appeal
directly before the Tribunal against order passed u/s. 143(3) r.w.s.
263 of the Act. The Tribunal noticed that an appeal against an order
passed u/s. 143(3) r.w.s. 263 lies with the CIT(A), u/s. 246A(1)(a) of
the Act, being an order passed u/s. 143(3) and not with the Tribunal
under section 253. Referring to the decision of the Apex Court in the
case of CIT vs. Ashoka Engineering Co. (1992) 194 ITR 645 (SC), it
observed that an appeal under the Act is a statutory right which
emanates only from the statute. The assessee does not have a vested
right to appeal, unless provided for in the statute.

The
Tribunal held that it cannot adjudicate the appeal filed by the
assessee, and that the assessee is at liberty to file an appeal before
the CIT(A) u/s. 246A(1)(a) of the Act, for adjudication on merits. It
also observed that while adjudicating the condonation application, the
CIT(A) shall liberally consider the fact that in the intervening period,
the assessee company was pursuing the appeal with the Tribunal, albeit
at the wrong forum with the Tribunal, instead of filing the first appeal
with the CIT(A) as provided in the Act.

The appeal filed by the assessee was dismissed.

Exemptions – On sale of Agricultural land – Sections 54 B & 54 F:

fiogf49gjkf0d
Commissioner of Income Tax vs. Narsing Gopal Patil INCOME TAX APPEAL NO. 2319 of 2013 dated: 1st MAR CH, 2016. (Bom HC)

(Narsing Gopal Patil, Pune vs. Asst CIT ITA No. ITA No.1544/PN/2012 & ITA 1815/PN/2012 (A Y: 2008-09) dt 3rd, May 2013).

The assessee for the subject assessment year, sold land which according to him had been used as agricultural land. The sale consideration was partly invested in the purchase of agricultural land and partly utilised for construction of the two buildings claiming it to be a residential house. The assessee claimed the benefit of exemption as available u/s. 54B of the Act to the extent the sale proceeds were utilised for purchase of the agricultural land and section 54F to the extent that the sale proceeds were utilised to construct the residential house. The Assessing Officer denied both the claims. Regarding the claim for the benefit of section 54B was concerned, he held that the assessee had not been able to prove that the land sold had been used for Agricultural purposes in the two preceding years prior to its sale.

The CIT(A) held that the assessee was entitled to the benefit of section 54B in as much as it had led evidence before the Assessing Officer, that the user of the land sold was for agricultural purposes by furnishing 7/12 extract and his return of income filed for the Assessment years 2002 – 03 to 2007 – 08 disclosing agricultural income. The other claim of the assessee for exemption u/s. 54F was denied by the CIT(A).

The Dept. challenged the CIT (A) order to the extent it allowed the claim for benefit of section 54B, and assessee as regard section 54 F, before the Tribunal. The Tribunal upheld the order of the CIT(A) in granting the benefit of section 54B to the assessee, on the ground that the assessee had produced evidence, to show that the land which was sold, was in fact used for agricultural purpose during the period of two years prior to the date of its transfer. This evidence was in the form of 7/12 extract as per land revenue record and also return of income filed for the assessment year 2005 – 2006 to 2007- 2008 in which the assessee had declared its agricultural income.

Similarly, the Tribunal upheld the claim of section 54 F by holding that, so long as the assessee’s claim of exemption was limited to the investment in the construction of the residential portion of the building, the same was held to be allowable.

The Hon’ble High Court observed that the finding recorded by the lower authorities was a finding of fact, that the subject land was being used for agricultural purpose in the two years preceding the date of the sale. This finding of fact was rendered on the basis of 7/12 extract led as evidence before the Assessing Officer, which indicates the manner in which the land is being used. In fact, as correctly observed by the Tribunal, there is a presumption of the correctness of entries in the land revenue record in terms of section 157 of the Maharashtra Land Revenue Code, 1966. This presumption is not an irrebuttable presumption and it will be open for the Assessing Officer to lead evidence to rebut the presumption. However, no such evidence was brought on record by the Revenue to rebut the presumption. Moreover, the assessee has also placed before the authorities its return of income filed for the assessment year 2005 – 2006 to 2007- 2008, wherein he had inter alia declared agricultural income. In view of the fact that the revenue has not been able to establish that the evidence led by the assessee is unreliable by leading any contrary evidence, there is no reason to discard the evidence produced by the assessee. Thus, there is a concurrent finding of fact by CIT(A) as well as the Tribunal that the land has been used for agricultural purpose. Thus, no substantial question of law arises. However, the Court admitted the question relating to section 54 F claim i.e allowing exemption under section 54F, when the investment made by the assessee is in a ‘commercial cum housing complex’.

Section 14A – Shares held as stock in trade – Disallowance cannot be made :

fiogf49gjkf0d
Difference in brokerage income shown in service tax return and in the Profit and Loss account – Excess brokerage on account of method of accounting:

Commissioner of Income Tax 4 vs. Credit Suisse First Boston (India) Securities Pvt. Ltd. INCOME TAX APPEAL NO.2387 of 2013 dt : 21ST MAR CH, 2016 (Bom HC) (Affirmed Mumbai ITAT decision on the above issues DCIT, CIT – 4(1) vs. M/s Credit Suisse First Boston (India) Securities Ltd. ITA no : 7354/Mum/2004, AY : 2001- 02 dt: 06/03/ 2013)

The assessee had been reflecting in the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage was been shown on actual basis on the basis of constant method adopted by the assessee. The AO made an addition on this account . The CIT (A) and Tribunal recorded a finding that sometime the assessee was required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee was also required to waive part of the brokerage disputed by the clients. Therefore, difference as per the service tax return and as per profit and loss account was found explainable. This was a minor difference, which had been reconciled by the assessee. In the above view, the Hon’ble Court held that question as formulated does not give rise to any substantial question of law.

As regards section 14 A, it was observed that the Assessing Officer had disallowed the expenditure, on the ground that the Assesee had earned dividend income in respect of the shares held by the assessee. There is no dispute between the parties that the shares held by the Assessee are stock in trade, as the assessee is a trader in shares and had in its books classified it under the head ‘Stock in Trade’. The Revenue conceeded that the issue stood concluded against the Revenue and in favour of the Assessee, by the decisions of this Court in HDFC Bank Ltd. vs. The Deputy Commissioner of Income Tax2(3) (Writ Petition No.1753 of 2016 rendered on 25th February, 2016). In view of the above, the Hon’ble Court held that question as formulated did not give rise to any substantial question of law.

Section 48 – Capital gain – Full value of consideration – computation of capital gain only refers to full value of consideration received – no occasion to substitute the same :

fiogf49gjkf0d
Commissioner of Income Tax Central IV vs. M/s. B. Arunkumar & Co. Income Tax Appeal NO.2337 OF 2013 dt 8/3/2016 . (Bom HC)

(Affirmed Mumbai ITAT decision in ACIT Cir.16(3) vs. M/s. B. Arunkumar & Co., ITA No.8272/M/11, AY : 2008- 09, Bench B, dt: 24.05.2013).

The assessee was a firm belonging to one Harshad Mehta Group. The assessee firm owned 19% shares in a company namely M/s. Inter Gold (India) Pvt. Ltd. Shares in the aforesaid company were acquired by the assessee-firm during the years 2002 and 2003 at different rates and these shares were not tradable in the open market. The balance share holding in M/s. Inter Gold was held by Sh. Arun Kumar Mehta family members (38%) and by foreign companies (41%). The assessee sold its 19% shareholdings in M/s. Inter Gold (India) Pvt. Ltd. to one M/s. Rosy Blue (I) (P) Ltd. and returned a capital loss on account of indexation. The consideration for the sale of shares in two tranches was Rs.750 per share and Rs.936 per share respectively.

The Assessing Officer did not accept the capital loss as claimed and sought to substitute the consideration received by the assessee at Rs.936 and Rs.750 per share with the value of Rs.1,225 per share as consideration received on the sale of its shares to M/s. Rosy Blue India Pvt. Ltd. This substituted value being the breakup value of the shares, was taken as its fair market value (FMV). In the result, the Assessing officer worked out the long term capital gains at Rs.4.57 crore instead of loss at Rs.3.65 crore as claimed. Being aggrieved, the assessee carried the issue in appeal to the CIT (Appeals). The CIT (Appeals) allowed the appeal of the assessee. He held that in the absence of any provision in the Act to replace the consideration received on sale of shares, by adopting the market value is not permissible.

In contrast, attention was drawn to section 50C, which provides for substitution of the consideration received on sale of land and buildings by the stamp duty value of land and buildings (immovable property). He further held, that the Assessing Officer cannot substitute the consideration shown as received on sale of shares by the assessee in the absence of evidence, to indicate that the consideration disclosed on sale of shares was not the complete consideration received and/or accrued to the assessee. Being aggrieved, the Revenue carried this issue in appeal to the Tribunal. The Tribunal reiterated the findings of fact rendered by the Commissioner of Income Tax (Appeals) that the transfer of the shares at the declared consideration was not done by the assessee with the object of tax avoidance or reducing its tax liability. The Tribunal, in the impugned order, placed reliance upon the decision of the Apex Court in CIT vs. Gillaners Arbuthnot and Co. (87 ITR 407) and CIT vs. George Henderson & Co. Ltd. (66 ITR 622), to conclude that, where a transfer of a capital assets takes place by sale on receipt of a price, then the consideration fixed/bargained for by the parties should be accepted for the purpose of computing capital gains. It cannot be replaced by the market value or a notional value. The full value of consideration is the money received to transfer the assets. Accordingly, the Tribunal dismissed the Revenue’s Appeal and upheld the order of the CIT (Appeals).

The Revenue before the Hon’ble High Court, contented that the decisions of the Apex Court relied upon in the impugned order were rendered under Income-tax Act, 1922 and therefore, would not apply while considering the Act.

The Hon’ble court held that, it was not the case of the revenue that the amount disclosed by the respondent assessee, was less than what has been received by them or what had accrued on sale of its shares. The revenue has not in any manner shown that the consideration disclosed by the assessee to the revenue, is not the correct consideration received by them and that the same should be replaced. Moreover, wherever the Parliament thought it fit ,that the consideration on a transfer of a capital asset has to be ascertained on the basis of market value of the asset transferred, specific provision has been made in the Act. To illustrate section 50C provides for stamp value duty in case of transfer of land or buildings. Similarly, section 45(2) and 45(4) provide that in cases of conversion of the investment into stock in trade or transfer of shares on dissolution of a firm to its partners respectively has to be at market value. The consideration disclosed on sale of shares by the assessee was infact the only consideration received/ accrued to it, no occasion to substitute the same can arise. Accordingly, the appeal of Revenue was dismissed.

TDS – Disallowance u/s. 40(a)(i) – Royalty – Payment for import of software – Not royalty – Tax not deductible at source on such payments – Amount not disallowable u/s. 40(a)(i)

fiogf49gjkf0d
Wipro Ltd. vs. Dy. CIT; 382 ITR 179 (Karn)

The Assessing Officer disallowed the claim for deduction of expenditure incurred for import of software relying on section 40(a)(i), on the ground that the payment was a royalty and that the tax was not deducted at source. The Tribunal allowed the assessee’s claim, holding that the payment made by the assessee for import of software is not royalty.

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held that the payments made by the assessee for import of software did not constitute royalty u/s. 9(1)(vi) of the Act and there was no obligation to deduct tax at source u/s. 195 and as such the expenditure cannot be disallowed u/s. 40(a)(i) of the Act.